Health Care Sector Rating: Outperform

What is the health care sector?

The health care sector includes health care providers and services, health care equipment and supplies, and health care technology companies. It also includes companies involved in the research, development, production and marketing of pharmaceuticals and biotechnology products.

Health care sector overview

In general, health care companies’ balance sheets are solid, their stocks have offered attractive dividend yields and the sector’s overall cost structure appears to have improved. Demand appears to be on the rise for health care products and services. On the other hand, political rhetoric around the Affordable Care Act can be expected to fuel continued volatility.

Market outlook for the health care sector

The health care sector has a lot of positives going for it and has had a good run as of late: Valuations appear fair to slightly below average, balance sheets are solid, stocks generally have good dividend yields, and the overall cost structure appears to be much improved. Also, demand appears to be on the rise for health care products and services, partly as a result of an aging population.

The Affordable Care Act continues to be a source of volatility for the sector, but we believe this has created potential opportunities for investors and are currently rating the group at outperform. While the most recent effort to “repeal and replace” the ACA has now been effectively shelved, both sides of the aisle agree the status quo can’t continue, so some changes seem likely to occur, but what form those will come in is virtually impossible to know at this point. This is a story that will continue to develop over the next several months, at least. This will likely keep the health care sector a bit more volatile than usual, but also create some opportunities for investors willing to ride the potential roller coaster. Another factor potentially helping the group, the Federal Reserve continues to raise rates and—according to BCA Research—the sector has outperformed during Fed hiking cycles on average since 1970. Since past performance does not guarantee future results, we acknowledge that there are risks and it could be a bit of a bumpy ride, but we believe that brighter prospects are ahead and remain comfortable with our outperform rating on the group. 

We believe an outperform rating for the entire sector is appropriate, although at times it will feel disappointing as the sector experiences both short-term dips on speculation as to what changes may or may not occur, but we urge investors to remain patient and ride out these short-term potential storms.

Factors that may affect the health care sector

Positive factors for the health care sector include:

  • Increased need for services: An aging population requires more extensive drug treatments and medical care. The health issues associated with obesity also could boost demand for medical services.
     
  • Strong financials: Balance sheets in the health care sector remain flush with cash, increasing the possibility of higher dividend payments, share-enhancing stock buybacks, and mergers and acquisitions.

Negative factors for the health care sector include:

  • Regulatory uncertainty: Despite the elevated rancor in Washington and Republican to this point unable to agree on a way forward, the ACA and other health care-related policies still seem likely to change at least somewhat, but what those changes may be are virtually unknowable at this point.
     
  • Fiscal policy concerns: The current fiscal situation in Washington creates continued uncertainty regarding the health care sector. Medicare reimbursement rates, for example, could be changed due to budgetary problems.

Clients can see our top-rated stocks in the health care sector.

Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare.

Schwab Sector Views

Consumer discretionary

Consumer staples

Energy

Financials

Health care

Industrials

Information technology

Materials

Real estate

Telecom

Utilities

 

Next Steps

Talk to Us
To discuss how this article might affect your investment decisions:
-          Call Schwab anytime at 877-338-0192.
-          Talk to a Schwab Financial Consultant at your local branch.
 

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