After underperforming for nearly a decade, stocks in one sector have come alive and outpaced the overall market for the past two years. And MoneyShow's Howard R. Gold thinks these stocks may not be finished quite yet.
The four and a half year-plus bull market is looking a bit tired, but one sector has really come into its own.
Health care stocks, which underperformed for almost a decade, have outpaced the overall market for more than two years. The Health Care Select Sector SPDR ETF (XLV) has gained 86% from August 10, 2011 through Tuesday, November 12, 2013. It beat the Standard & Poor's 500 index (SPY) by nearly 30 percentage points and trailed only soaring consumer cyclicals during that time.
But whereas cyclicals already have had a monster run, health care stocks may have much further to go.
This diverse sector, which includes red-hot biotechnology, Big Pharma, medical device makers, hospitals, health insurers, and other services, is profiting from structural shifts far beyond the changes brought in by the Affordable Care Act.
Competition, pricing pressures, growing efficiency, and innovation are combining with an aging population and a burgeoning middle class in emerging markets to create new demand. Demographics and economics could propel this sector higher for years.
In fact, I think health care stocks may have entered a new secular bull market, which is why I think you should take some profits on cyclicals and other market-sensitive stocks and reinvest the money into this group.
Three experts I spoke with stopped short of calling this a secular bull market, but they weren't shy about singing health care's praises.
“Health care has been an outperforming sector for a very long time,” said Eddie Yoon, manager of the Fidelity Select Health Care fund (US:FSPHX), which has beaten the market since its inception in 1981. (Yoon has managed it for the past five years.) “It provides a lot of stability and a lot of exposure to tailwinds that are happening globally.”
“We're clearly in a favorable environment,” said Andy Acker, manager of the Janus Global Life Sciences fund (LX:JGBLFSB) since 2007. “We expect to see new therapies that can drive growth for many years for the sector.”
Everyone I spoke with believed that the Affordable Care Act, though off to an abysmal start, will work sooner or later. (I have my doubts.)
“I think this is a question of when this gets resolved, not if,” said Acker. “Millions of people will sign up for health care.”
But Obamacare won't be the driving force for the industry, said Terry Hisey, who heads the US Life Sciences Sector of Deloitte LLP. “Market forces in play…are actually having a bigger effect,” he told me.
That's most evident in biotechnology, where Acker sees “an explosion of innovation.” Six of the seven biggest biotech companies have promising drugs that already have been approved by the Food and Drug Administration and whose patents won't expire for a decade, Acker said.
The big boom in biotech drugs
Last year, the FDA approved 39 new drugs, the most in 16 years, and 2013 is on a pace to be an “above-average year” in new drug approvals, Acker said. Many of them were discovered by biotech companies. Promising therapies for certain cancers, multiple myeloma, and irritable bowel syndrome, among others, are in the works. “Biotech is definitely attractive in terms of the innovation that's happening,” he told me.
Unfortunately, much of that promise already is in biotech's share prices. The iShares Nasdaq Biotechnology ETF (IBB) has risen 53% thus far in 2013, double what the S&P has done.
Surprisingly, staid Big Pharma stocks actually outperformed biotech from March 2009 through March 2013, and they continue to beat the overall health care sector and the market. Yet the fundamentals are challenging.
The big drug companies are having a tough time replacing revenues lost to patent expirations. Pfizer's (PFE) monster cardiovascular drug Lipitor's patent expired in 2011, and its Celebrex pain relief drug loses protection next year. Altogether, some $250 billion in Big Pharma's revenues are at risk from expirations and generic drug competition through 2015, according to U.S. Pharmacist.
Furthermore, said Hisey, “it's becoming increasingly difficult…to introduce new products into the marketplace. The bar has gotten higher for drug companies.”
Big Pharma has responded with massive cost cuts, rationalizing both its sales forces, and R&D, and the companies have expanded in emerging markets. Investors are looking beyond the so-called “patent cliff” and like the nice dividends these blue-chip stocks have traditionally paid.
Still, the fund managers find better value elsewhere.
Yoon likes medical device stocks, despite the controversial medical-device tax in the Affordable Care Act. Cost pressures on health providers will limit expansion in the US, but he looks for sales to grow in the high teens in emerging markets.
And the group's valuation is attractive. “They've been relative underperformers,” he said.
Acker likes health insurers, which have actually beaten the S&P this year. Obamacare will hasten consolidation, producing “fewer larger insurers over the long-term.” He's waiting for a shakeout to buy into a group he views as “an opportunistic investment.”
Given all the moving parts, your best bets are broad-based sector funds like Janus's or Fidelity's, both of which have excellent track records and expense ratios under 1%. Among ETFs, Guggenheim S&P 500 Equal Weight Healthcare (RYH) has outperformed plain-vanilla XLV, but the latter has lower expenses and a higher yield.
My one reservation about health care is that it's come a long way. Some areas, particularly biotech, look ripe for a decent correction.
But the outlook remains solid. As Fidelity's Yoon summed up: “You can get a lot of growth exposure without a lot of economic risk.”
Sounds like the best of both worlds, which is why I think health care should be a leading sector for quite a while.