Story from San Francisco Chronicle
Health care stocks, which have been plagued by a variety of ailments in recent years, are emerging as one of the stock market's few bright spots.
Over the past three months, health care companies in the Standard & Poor's 500 are up 4.4 percent on average, compared with a drop of 7.9 percent for the overall index. The only other S&P 500 sector in positive territory is consumer staples, up 0.27 percent. Health care and consumer staples traditionally outperform other sectors when the economy slows, under the assumption that no matter how bad things get, people will always need food, drink and medical care.
While that is undoubtedly a factor this time around, some analysts say the sector's recovery could be more than temporary.
"I'm bullish now for the short, medium and long term," says Jonathan MacQuitty, a partner in Abingworth Management Inc. in Menlo Park, which specializes in health care investing. "I'm not always short-term bullish, but I think health care will be the best performing sector for the next 12 months."
The strength in health care follows several years of underperformance, which drove many stocks to cheap or reasonable valuations.
Investors have long fretted about the ability of big pharmaceutical makers to replace blockbuster drugs losing patent protection and what would happen to drug and managed care companies if a Democratic president teamed up with a Democratic Congress and got serious about reining in medical costs.
While those fears remain, they are taking a backseat to worries about housing, energy, the financial system and geopolitics. "There is more of an emphasis on financial and energy regulation than health care reform," says Brian Belski, chief U.S. sector strategist with Merrill Lynch.
Belski believes that investors are now seeing health care stocks not so much as a defensive play but as a growth story. He says it is one of the few sectors that has delivered double-digit earnings growth over the past few quarters and is still expected to grow moderately in coming quarters.
"It's hard to beat demographic trends," he says. "The population is getting older. Biotech, life science and medical device (companies) are still at the forefront of innovation," he says.
Belski admits that health care is benefiting from people fleeing financial stocks and, more recently, energy.
The sector has also been buoyed by foreign firms with strong currencies looking to buy U.S. companies on the cheap. Since last year, overseas firms have completed or attempted takeovers of MedImmune, MGI Pharma, Millennium Pharmaceuticals, Barr Pharmaceuticals and Genentech.
Mutual funds focused on health care are up 6.84 percent over the past three months, according to Morningstar. It is the only category of stock funds - domestic or international - in positive territory during the period.
Funds with the greatest exposure to biotech companies are doing the best, says Morningstar analyst Wenly Tan.
Biotech companies in general have done a better job developing new drugs than old-line pharma companies, making them prime candidates for takeovers or distribution deals.
"Biotech companies are a lot more mature these days, they are holding onto more cash. They are not turning public as early as they used to," Belski adds.
Within the sector, Belski favors biotech, medical device and life-science companies that make manufacturing equipment. His favorites include biotech company Celgene, Johnson & Johnson, device maker Medtronic and Thermo Fisher, which makes medical equipment and chemicals.
Among S&P 500 companies, the biggest health care gainers over the past three months include generic-drug maker Barr (up almost 57 percent thanks to the takeover offer), biotech giant Amgen (up 51 percent), Varian Medical Systems (up 37 percent), Celgene (up 21 percent) and King Pharmaceuticals (up 19 percent).
Laggards include managed-care companies Coventry Health (down 22.2 percent) and UnitedHealth Group (down 16 percent); Biogen Idec (down 12 percent); Merck (down 10 percent); and Aetna (down 9 percent).
Health care heals itself
Performance of S&P 500 industry sectors
| S&P sector | Last 3 months | Year to date |
| Health care | 4.39% | -7.29% |
| Consumer staples | 0.27 | -2.73 |
| Technology | -4.22 | -11.69 |
| Consumer discretionary | -5.51 | -9.18 |
| Utilities | -8.32 | -12.51 |
| Industrials | -8.49 | -13.08 |
| Materials | -12.34 | -8.30 |
| Telecom services | -14.02 | -24.13 |
| Energy | -14.05 | -8.58 |
| Financials | -18.56 | -31.53 |
Source: Bloomberg
