Health-Care Stocks in U.S. Seen as Costly Before Valeant Dispute

  • Credit Suisse strategist cuts industry ratings to underweight
  • Change in view reflects `extremely expensive valuations'

Health-care stocks were poised for a fall even before they were shaken yesterday by a short seller’s fraud accusation against Valeant Pharmaceuticals International Inc., according to Lori Calvasina, chief U.S. equity strategist at Credit Suisse Group AG.

Calvasina recommended last week that investors reduce holdings of drug and biotechnology companies, as well as providers of health-care equipment and services. The groups suffer from “extremely expensive valuations,” the New York-based strategist wrote in an Oct. 15 report.

The chart below highlights the valuation issue by comparing price-earnings ratios between the Standard & Poor’s 500 Health Care Index and the S&P 500, according to data compiled by Bloomberg. This year, the industry’s P/E has exceeded the S&P 500’s ratio by as much as 34 percent, the most since 2001. The premium stood at 19 percent yesterday.

Both health-care categories were cut to underweight, meaning that investors should have a smaller stake in them than their share of benchmark indexes would suggest. They had been rated market weight.

Valuation isn’t the only reason to be concerned, according to Calvasina. She wrote that smaller investors “are no longer willing to prop up the space,” based on outflows from funds focusing on health care, and analysts aren’t increasing earnings estimates as they did earlier in the year.

The health-care index fell as much as 2.5 percent yesterday after Citron Research, a short seller that has criticized Valeant’s business, published a report claiming the company recorded fake sales to phony customers through a specialty pharmacy. Valeant, based in Laval, Quebec, said the accusation was “erroneous.” The industry gauge closed with a loss of 0.9 percent.

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