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Healthcare Stocks Have Value But Where?

• Large Cap Biopharmaceuticals Still  Look Good.
• SMID Biotech Still Tradable with Dealmaking Potential.
• Stock Picking Is More Important than ETFs.

Many healthcare stocks may be defensive in nature but if you are overweight the basic plays like the XLV or biotech funds like the Fidelity Biotechnology Fund (FBIOX) you are trailing the market over the past two years. The S&P 500 (SPY) is up almost 18% in 2023 while the XLV lost 1.68% despite being up almost 44% over 5 years. There are several reasons for this but what has happened over the past two years is that the Biden Administration wants to reduce healthcare expenses by lowering drug costs. And the FTC has been fighting M&A so deals have been slow. Moreover, tech stocks like semiconductor chips and IT software have boomed as data is ever important. Moreover, the disruption of markets caused by the pandemic reduced elective surgeries and created a short-term boomlet in vaccines. Many of these healthcare technology stocks reached a peak in mid-2021 and have yet to recover.

Large cap biopharmaceuticals did outperform the market because of strong balance sheets, dividends, and new products but only if you picked the right stocks. The leading biopharmaceutical stocks YTD: are LLY up 52% YTD, VRTX up 21.58%, and REGN up 15.27%. Over 5 years the numbers look even better with returns for Lilly (LLY) a huge 427%, Regeneron (REGN) 104%, and Vertex(VRTX) 90%. What these companies have in common are innovation in R&D with new blockbuster drugs. Merck (MRK) also had a great 5-year performance with products in oncology. And the valuations for most of these large caps are attractive with attractive FWD PEs and Price to Sales.

Do We Need a Weaker Economy for Healthcare Stocks to Outperform?

Last week healthcare stocks lagged again as investors’ moved broadly into other sectors: energy, tech, industrials, and materials. But with drug pricing legislation targets revealed and a “go ahead” by the FTC for the Amgen/Horizon acquisition, we could see a pick-up in fourth quarter deal-making.

Another sector of healthcare stocks hit hard in 2023 was the US Healthcare providers (IHF) down 7.34% YTD, UNH is flat YTD, and CVS down 29% YTD!

SMID caps lagged mirroring the Russell 2000 (IWM). Small cap growth is a favorite area for speculation as tracked by the XBI. Despite some hot streaks in Q2 2023, the momentum did not last and the XBI is down YTD. It's been a roller coaster year for small caps.

Many investors consider 2023 to be a great year considering the S&P 500 is up 18%. Treasuries offer a 5% yield so investors can protect their gains with blue chips (JNJ, MRK) and cash. Or with a more aggressive approach add to MedTECH assuming trends improve with an ETF like the iHi or lagging blue chips ABT, BDX, and SYK. Experienced biotech traders can play SMID biotech with the IBB, consolidating in the $125-130 zone.

In the meantime we watch the FED hoping rates don’t go much higher than one more 0.25% move up in rates. For now some economists are expecting a soft landing for the economy even if rates are higher for longer but inflation must stay low.

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