Health care stocks that are good for you

A dynamic of haves versus have-nots means that health care is increasingly all about stock picking. Kate sees opportunities in biotech, medical devices, U.S. managed care and selected big pharma with promising drug pipelines.

Health care stocks are playing catch-up after about six quarters of underperformance, with many stocks still in the bargain bin, particularly beaten-up biotechs.

Is health care a buy? We think a selective approach is appropriate. Health care has a lower stock correlation than other sectors, reflecting variations in innovation cycles, drug patents and pipelines. That dynamic reinforces the importance of selecting winners and avoiding losers.

Health care stocks have historically traded at a premium to the broader equity market, partly reflecting their growth characteristics and popularity as a source of income. Yet today some sub-industries such as biotech sell at a discount. Many trade near the bottom of their historical valuation range, as the Bargain bin chart shows.

BII-global-equity-chart

The health care sector is made up of haves (those with potential category-killer medical products including drugs, devices and diagnostics) and have-nots (companies in areas that face generic competition or product obsolescence). An appropriate strategy is focusing on the merits of individual stocks rather than the attributes of the entire sector.

A challenge for drug makers is that politicians, regulators and consumers are clamoring to curb growth in drug prices. U.S. prescription drug prices rose 5.2% in 2016, the largest increase since 2001, according to the Bureau of Economic Analysis. An ongoing Republican attempt to “repeal and replace” Obamacare may lead to more political uncertainties for some health insurers and hospitals. Yet worries about drug pricing and other policy risks are largely reflected in valuations.

With most large-cap pharma companies in the mature stage of product development, many are seeking to buy growth. U.S. tax reforms encouraging repatriation of overseas cash could trigger a surge in mergers and acquisitions. Pharmaceutical companies will dominate M&A in 2017 if history is a guide.

Bottom line

We see opportunities in biotech, medical device makers, U.S. managed care companies and selected big pharma with promising drug pipelines. Investors can wait for a catalyst such as a takeover (selected small and mid caps) or pocket steady dividends until the market reprices the value of a pipeline. When investing in health care, it’s important to be selective. Read more on this in my latest Global Equity Outlook publication.

Kate Moore is BlackRock’s Chief Equity Strategist and a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

Investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and more volatile than the general securities market.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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