Healthcare stocks are badly lagging the market this year. Here's why a top strategist at $2.9 trillion State Street says they're set to rally.
- Michael Arone, a chief investment strategist for $2.9 trillion State Street Global Advisors, says healthcare stocks are extremely appealing even though investors are focused on the political risks the companies face.
- Arone says fundamentals for healthcare stocks are getting better, which is rare in the stock market today. He thinks the stocks are likely to rally as the threat of Medicare for All fades.
- The sector has lagged far behind the rest of the market this year, as the benchmark S&P 500 index is up 19.5% in 2019 and the healthcare sector overall has gained just 5.7%.
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Investors are always weighing the facts they can see against the fear of what they don't know.
That balance has been damaging for health care companies this year, and Michael Arone - the chief investment strategist for the US SPDR Business at $2.9 trillion State Street Global Advisors - says investors are going to realize they're getting it wrong.
Arone argues that Medicare for All proposals from leading Democratic presidential candidates, including Massachusetts Senator Elizabeth Warren, are a major reason the sector has missed out on the market's rally in 2019.
While the benchmark S&P 500 has jumped 19.5%, led by tech companies and other growth stocks, the S&P healthcare index has risen just 5.7%. Only energy stocks have delivered weaker returns. But Arone says that if investors look deeper, they'll discover the sector has a lot of favorable characteristics.
"Once the noise of the political situation is removed, I think healthcare stocks will rally," Arone said in an exclusive interview with Business Insider.
He calls biotech and healthcare services companies especially intriguing. Investors who want to add exposure to those sectors can do so through the SPDR S&P Biotech ETF and SPDR S&P Healthcare Services ETF.
One reason for Arone's view is that the basic business metrics for healthcare companies are improving, which makes the stocks unique as trends for the broader market come down.
"It's one of the only areas where analysts have been increasing their earnings expectations," he said. "Revenue growth and earnings per share growth of the healthcare sector is greater than that of the overall market."
He adds that investors' neglect of healthcare companies has helped create the opportunity he's identifying, as the combination of improving metrics and relatively minimal stock movement makes healthcare valuations look better compared to the rest of the market.
"Sentiment is poor, valuation is attractive, growth is attractive, so investors aren't appreciating the opportunity," he said. "It's still a pretty inexpensive asset at a time there's not a lot of inexpensive assets."
He continues that even with the possibility of structural reforms, healthcare companies will benefit as the populations of developed countries grow older and demand for healthcare grows and as countries and organizations spend more money on research to treat diseases that disproportionately affect the elderly, such as cancer and Alzheimer's.
That adds up to a compelling combination in Arone's view.
"It's a growth area that's not cyclical, that has better growth characteristics, that trades at a discount to the market, and it's one of the worst performing sectors this year after what was a very good last year," he says.