Barron\'s - 21.10.2019

M4 BARRON’S October 21, 2019

care stocks may be fully reflected in the sec-

tor’s valuations. Lori Calvasina, head of U.S.

equity strategy at RBC Capital Markets, cut

health care to a Neutral weighting in March,

citing crowding by fund managers and politi-

cal risks. Fast-forward seven months, and

the S&P 500 Health Care index trades at a

substantial discount to the S&P 500.

Calvasina says: “Last week, we high-

lighted it as one of the three sectors most at

risk under [an Elizabeth] Warren presi-

dency from a policy perspective. Our valua-

tion work suggests that much of the political

risk has already gotten priced into the sec-

tor—keeping us firmly in the neutral camp

and out of the bearish camp.”

Health care isn’t just cheap—it is the sec-

ond-cheapest S&P sector. At 15.1 times 12-

month profit forecasts, it trades at a lower

multiple than any other group, except finan-

cials. Is the discount big enough to encour-

age investors to start bargain hunting?

UBS strategist Francois Trahan contends

that it is—and not just because health care is

cheap. Trahan, like many, is concerned about

slowing U.S. economic growth. The deterio-

rating economy partially explains why 155

companies in the S&P 500 are now expected

to have an earnings growth decline, up from

68 at the end of 2018.

The health-care sector, however, has been

relatively immune to this pressure. Just

seven of its stocks are expected to see an

earnings growth decline, up from six at the

end of last year. “This trend makes health

care a relatively reliable area for investors

seeking to avoid companies with slowing

growth prospects,” Trahan writes.

Trahan screened out the health-care

shares in the S&P 500 that he considers over-

bought, are too volatile, and have above-aver-

age valuations. That left him with 19 stocks,

including pharmaceutical giant Pfizer (PFE),

medical-equipment company Medtronic

since July. A falling dollar could provide a

boost to U.S. multinationals and economically

sensitive stocks. “As the dollar weakens,

global cyclicals should gain a tailwind as the

desire to own safe haven assets diminishes,”

writes John Kolovos, chief technical market

strategist at Macro Risk Advisors.

Maybe we just need to redefine what

nice things are.

Health Care Gets a Boost

For an industry dedicated to keeping people

healthy, health care has been rather sick of

late. That changed this past week, and the

recovery of the sectors’s stocks might just

be starting.

If health care hasn’t been left for dead, it

has at least been left behind in 2019. The

S&P 500 Health Care Sector index has re-

turned just 8% this year, while the S&P 500

has gained 22%. That makes the sector the

second-worst performer this year, besting

only the beaten-down energy stocks.

Yet health-care stocks gained 2% this past

week, making them the best-performing

group in the S&P 500. In fact, all five of the

top S&P issues were in the group: McKes-

son (MCK), AmerisourceBergen (ABC),

Cardinal Health (CAH), Cigna (CI), and

UnitedHealth.

The sector benefited from a confluence

of factors. UnitedHealth, for one, reported

stronger-than-expected earnings, helping to

lift managed-care stocks. Reports of a possi-

ble opioid settlement helped boost pharma

companies, such as Teva Pharmaceutical

Industries (TEVA). Even better, the Demo-

cratic debate on Tuesday night provided the

first glimmers of hope that Medicare for All

might not be the preferred path among the

candidates and that large managed-health

companies might survive, even if a Demo-

crat wins the presidential election in 2020.

Either way, the political risks to health-

VITALSIGNS

Friday's Week's Week's

Close Change %Chg.

DJIndustrials 26770.20 – 46.39 – 0.17

DJTransportation 10508.74 + 216.76 + 2.11

DJUtilities 866.01 – 0.65 – 0.08

DJ65Stocks 8940.80 + 36.05 + 0.40

DJUSMarket 740.58 + 3.70 + 0.50

NYSEComp. 13006.64 + 79.72 + 0.62

NYSEAmerComp. 2440.30 + 8.69 + 0.36

S&P500 2986.20 + 15.93 + 0.54

S&PMidCap 1936.76 + 20.19 + 1.05

S&PSmallCap 950.37 + 14.77 + 1.58

Nasdaq 8089.54 + 32.50 + 0.40

ValueLine (arith.) 6164.70 + 53.03 + 0.87

Russell2000 1535.48 + 23.58 + 1.56

DJUSTSMFloat 30532.11 + 168.85 + 0.56

LastWeekWeekEarlier

NYSE Advances 1,898 1,706

Declines 1,139 1,337

Unchanged 58 56

NewHighs 303 231

NewLows 101 147

AvDailyVol(mil) 3,115.5 3,206.3

Dollar

(Finexspotindex) 97.24 98.30

T-Bond

(CBTnearbyfutures) 160-070 160-140

CrudeOil

(NYMlightsweetcrude) 53.78 54.70

InflationKR–CRB

(FuturesPriceIndex) 175.75 176.04

Gold

(CMXnearbyfutures) 1488.20 1482.70

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