What is the health care sector?
It includes hospitals, health maintenance organizations (HMOs), health care technology and equipment, as well as pharmaceutical and biotechnology companies.
The Health Care sector has many positives, including an aging global population and a growing middle class in emerging markets, all of whom will demand more extensive drug treatments and medical care over time. Meanwhile, 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.
On the other hand, health care reform probably will be a focus during the run up to the 2020 elections, prompting volatility to increase. Proposals to cut costs, which could weigh on providers’ profitability, may come from both sides of the political aisle.
In general, we believe the risk of major legislative changes is relatively low. Potential changes under discussion are well known, and probably already reflected in stock prices. Even after strong relative returns in recent months, we can see this in the current discount to the overall market in numerous valuation metrics; the sector has generally traded at a premium to the market over the past 20 years.
The durability of Health Care sector earnings during economic downturns tends to lead to outperformance during periods of economic weakness, but we think that solid fundamentals, strong momentum and attractive relative valuations can lead to outperformance in a moderate growth environment, as well.
We believe an outperform rating for the entire sector is appropriate.
Sector Overview: Health Care is positive on Value and Relative Strength
Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or anticipated tax legislation.
Source: Charles Schwab, as of 01/23/2020.
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
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. Clients can log in to see our top-rated stocks in the Health Care sector.
* As represented by the S&P 500 index
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