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: 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.
However, the Affordable Care Act continues to be a source of volatility for the sector, but we believe this is creating an opportunity for investors and are currently rating the group at outperform. While we are uncertain as to the ultimate outcome of the recently released “repeal and replace” legislation, we believe it will be more beneficial to the sector than the market is currently expecting. Republicans have traditionally been friendlier to the group and in fact the health care sector has outperformed during the six months following each of the past six Republican presidential wins, according to Ned Davis Research (NDR). Additionally, 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 were comfortable boosting the sector’s rating recently.
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: With the new mix in Washington, the ACA and other health care-related policies seem likely to change, benefiting some industries but potentially hurting others.
- 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.
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