Drugs Trump Tech as Investors Shift Earnings Bets to Health Care

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Traders are loading up on health-care shares, betting the industry will emerge as the brightest spot in an earnings period marked by disappointing results from some of the biggest technology companies.

An exchange-traded fund tracking health-care stocks in the Standard & Poor’s 500 Index absorbed 10 straight days of inflows through Wednesday, the longest streak since October 2012, according to data compiled by Bloomberg. The Health Care Select Sector SPDR Fund took in $680 million over the period, compared with an outflow of $338 million for a technology-focused run by SPDR.

With the Affordable Care Act creating millions of more customers, health-care companies are forecast to see the strongest profit growth of any S&P 500 group in the second quarter. And with merger activity attracting investors seeking takeover premiums, the industry is the most secure and sustainable equity investment right now, according to Bruce Bittles of Robert W. Baird & Co.

“Health-care has clearer visibility of earnings than a lot of other sectors,” Bittles, chief investment strategist at Milwaukee-based Robert W. Baird, which oversees $110 billion, said by phone. “The demographics certainly favor health-care in the long term.”

Stocks of pharmaceutical, biotechnology and health-care services companies have led the S&P 500 throughout most of 2015, with a year-to-date gain of 9.2 percent. Technology shares, the third-best among 10 groups, have advanced 2.6 percent. The S&P 500 slid 1.1 percent to 2,079.65 at 4 p.m. in New York.

Earnings Forecasts

Health-care companies are estimated to post 5.4 percent profit growth for the latest quarter. In a market that has seen forecasts decline across the board since the start of the year, the industry has been relatively resilient, with its forecast declining just 1.7 percentage points.

Meanwhile, the technology sector was supposed to deliver 13 percent quarterly growth, but has instead had expectations lowered to a 2.4 percent gain. The Nasdaq 100 Index slumped 1.1 percent Wednesday as results from Apple Inc., Microsoft Corp. and Yahoo! Inc. disappointed investors.

Out of the 14 health-care companies that have reported earnings so far this quarter, 13 have exceeded consensus analyst estimates and one has relayed results in line with forecasts.

On Thursday, drugmakers Bristol-Myers Squibb Co. and Eli Lilly & Co. reported quarterly profit that topped analysts’ estimates and raised their full-year forecasts. Device-maker Intuitive Surgical Inc. surged 8.9 percent on Wednesday following its earnings release. UnitedHealth Group Inc., the biggest U.S. health insurer, also raised its 2015 forecast after saying profit gained in the second quarter.

‘Positive Trends’

“Biotech continues to be strong, there’s a good amount of M&A that we think will continue, and there are fundamentals that we also view as pretty sustainable,” said Jim Russell, a Cincinnati-based portfolio manager at Bahl & Gaynor Inc., which has about $14 billion under management and advisement. “We see some positive trends carrying into the third quarter and even the end of the year.”

The enthusiasm has turned health-care stocks into the most expensive among the 10 main S&P 500 industries. The group’s price-to-earnings ratio is more than 24, its highest since the bear market at the turn of the century. All but a handful of the companies trade at a valuation that’s above the S&P 500 as a whole.

Bearish Wagers

Bearish bets are scarce. Short interest in the health-care ETF was 2.7 percent of shares outstanding on Tuesday, the lowest since December 2013, according to data compiled by Markit Ltd. That’s more than three percentage points less than the measure’s one-year average, the data show.

Optimism over biotechnology has sent drugmakers like Celgene Corp., Endo International Plc, Regeneron Pharmaceuticals Inc., Gilead Sciences Inc. and Vertex Pharmaceuticals Inc. up more than 200 percent since the beginning of 2013, while merger frenzy among managed-care companies has also helped fuel gains in health-care.

Cigna Corp. jumped 2.2 percent Thursday after two people with knowledge of the matter said Anthem Inc. is near an agreement to buy the company for about $48 billion. A deal would create the largest health insurer in the U.S. after almost a year of talks. Cigna has surged 50 percent this year.

“A lot of these companies are doing good work making headway in terms of bringing new products to market and also getting brand extensions from the existing franchise,” Russell said. “What’s most exciting to us about health-care is how sustainable it looks right now.”

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