Health-care stocks have outperformed the broader stock market this year. The Health Care Select Sector SPDR Fund (XLV), the biggest health-care ETF, has slid 9% this year, compared with the 15% drop for the S&P 500.
Bank of America strategists are impressed with the sector. It represents “our favorite overweight for today's macro environment,” they wrote in a commentary. They offer several reasons:
1.Health care performs better than all other sectors late in economic cycles. It also performs well during recessions.
2. Health-care stocks offer growth, defense, and yield, all at a reasonable price.
3. Health-care companies had the most upbeat outlook in their first-quarter earnings reports.
4. Longevity, aging demographics and the aftermath of the covid pandemic are “likely to help accelerate consumer and corporate spending.
5. “Mergers and activism could catalyze outperformance.”
6. Regulatory risks are overblown, especially with Republicans poised to take control of the House and Senate.
7. “Health care has been a long-term, risk-adjusted outperformer, with among the highest returns and lowest volatility since 1982.”
Key Stock Picks
Bank of America analysts cited several large-cap health-care stocks that they favor.
· Health insurer Humana (HUM) is Bank of America’s top large-cap stock pick for the health-care facilities and managed-care sector. The company “generates more than 80% of revenue … through Medicare Advantage, an industry with strong demographic tailwinds which should see top line growth of 7%-11%. Within that large, fast growing market, HUM is the No. 2 player … and has the highest quality scores (and therefore reimbursement) of any major plan.” Humana should benefit from rising interest rates, and government reimbursement rates are the highest in more than 10 years.
· Medical-equipment provider Thermo Fisher Scientific (TMO) is another pick. “We continue to believe that [Wall Street] underappreciates the positive changes at Thermo in the wake of covid and the implications of the PPD deal.” Thermo bought the clinical development company last year. “We think TMO's scale, coupled with end-to-end reach across the biopharmaceutical value chain, will empower it to compete in differentiated ways to win contracts.”
Humana
· Medical-equipment company Boston Scientific (BSX). “2023 could set up nicely with Watchman gaining steam, four deals turning organic …, and some potential margin upside if the $300 million inflationary pressures start to ease.” Watchman is a device designed to prevent blood clots in the heart.
· Medical equipment company Stryker (SYK). “We view SYK as a high quality asset that can navigate the choppy macro environment. SYK has consistently executed and repositioned the portfolio to take advantage of structural shifts in the market well ahead of competitors. SYK led the way with robotics and is exceptionally positioned for the next theme of shifting care out of the hospital.”
· Pharmacy chain CVS Health (CVS) is Bank of America's top large-cap stock pick for the health-care technology and distribution sector. “Despite the decline in CVS' vaccine/testing benefit, we believe the company is well positioned to execute on its primary care strategy in fiscal 2022. Compared to Walgreens (WBA), we view CVS's foray into primary care as more cohesive…”
