Analyst Optimism Grows for Healthcare Stocks

Some analysts are growing more optimistic about healthcare stocks even after healthcare companies in the S&P 500 ($SPX) (SPY) last quarter posted their first quarterly loss since the start of the pandemic in 2020.  Biotechnology stocks are coming off the worst quarter in three years, with the Nasdaq Biotech Index posting its first monthly gain since August.

As inflation surges, geopolitical tensions mount, and the Fed begins to start a new cycle of interest rate increases, investors have begun to move back into healthcare stocks that are often seen as a haven during tough economic times.  As a result, AbbVie (ABBV), AmerisourceBergen (ABC), Anthem (ANTM), and UnitedHealth Group (UNH)  have all jumped back to record highs even though, as a group, they still trade at valuations below the S&P 500 Index.

Goldman Sachs says it is “seeing a macro-driven mean-reversion underway toward a more normal historical P/E discount.”  Also, with hedge fund exposure to biopharma near a five-year low, it sees room for the large-cap drugmakers to move higher toward their historical discount to the S&P 500 as investors move into discounted stocks like AbbVie, Bristol-Myers Squibb (BMY) and Merck (MRK).

Wells Fargo & Co on Thursday upgraded their outlook on healthcare stocks to “favorable,” citing valuations and pent-up demand, noting the healthcare sector’s tendency to outperform during volatile times like an economic downturn or a rising interest rate environment.  Earlier this week, JPMorgan Chase said healthcare stocks are trading at a discount to historical levels while offering “a safe haven in a world with elevated geopolitical risks, high inflation, and decelerating global growth.”

Despite the recent upturn in healthcare stocks, small-cap stocks in the sector have fared much worse than larger-cap stocks, and many analysts recommend more selectivity in this area.  For example, Oppenheimer recommends that investors purchase higher-quality companies with “at least some element of a business structure/revenue generation.”