Healthcare stocks are poised to outpace the broader market for the rest of the year after a rough start, as investors find the cheap valuations irresistible. The Standard & Poor's Health Care Sector index had risen only 1.6 percent this year through Thursday, compared with an 8 percent climb for the broader S&P 500 index.
Strong dividends and balance sheets are enticing to investors, as are the basic demographics: an aging population that leads to greater demand for health services and products. Yet uncertainty over the fallout from the recently passed US health overhaul may keep investor enthusiasm in check.
"There's very little downside risk in the stocks because they're low P/Es, high dividends, strong balance sheets," said Bill Smead, portfolio manager of the Smead Value Fund. At 27 percent, healthcare is the Smead fund's biggest weighting. "The second half of the year is likely to be a lot better for these stocks," Smead said.
Healthcare, the third worst-performing sector this year behind telecommunications companies and utilities, showed its resiliency on Friday, as news of fraud charges against Goldman Sachs Group Inc shook the market. The S&P 500 was down 1.5 percent in afternoon trading versus only a 0.5 percent decline for the healthcare index. "Going forward, you don't have much downside risk," said Bernie McGinn, president of McGinn Investment Management. "They're not going to go anywhere because they haven't had the run-up."
Healthcare has been caught in a rotation out of defensive shares and into cyclical stocks as investors become more optimistic about an economic recovery. A reversal in sentiment over the economy could lead investors charging back to sectors like healthcare that are perceived to be steadier in uncertain times.
"I don't think that it's going to continue unabated," Michael Farr, chief investment officer at large-cap growth investors Farr, Miller & Washington, said of the bull market.
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