Health Care's Time Has Come to Look Cheap Relative to S&P 500by
Industry has lower forward P/E ratio for first time since 2013
Bank of America: Health care now as inexpensive as technology
Health-care stocks have become almost as cheap by historical standards as shares of technology companies, according to Savita Subramanian, chief U.S. equity strategist at Bank of America Corp.’s Merrill Lynch unit.
The chart below illustrates how she reached this conclusion, presented in a report yesterday: by comparing forward price-earnings ratios for the industry groups and the Standard & Poor’s 500 Index. The ratios are based on analysts’ profit estimates, as opposed to past results, and the ones used for the chart were compiled by Bloomberg.
In September, the S&P 500 Health Care Index’s forward P/E turned lower than the S&P 500’s for the first time since January 2013. The discount widened this month to as much as 5 percent -- in line with the comparable figure for the S&P 500 Information Technology Index, as the chart shows.
The health-care index would have to increase 16 percent for the forward P/E “to get back to average” in relative terms, Subramanian wrote. That’s close to an 18 percent potential gain for S&P 500 technology stocks on the same basis, according to the New York-based strategist. She based her calculations on data since 1986.
Within health care, life-sciences companies and the largest drugmakers look the most attractive, Subramanian wrote. While the report showed biotechnology stocks were cheap based on cash flow as well as forward P/Es, she wrote that the shares are suffering from a loss of momentum.
The S&P 500 Biotechnology Index peaked at a record on July 20 and then fell 23 percent through Sept. 28. The decline surpassed a 17 percent retreat in the broader health-care gauge, which reached its high on the same day.
“Not all of health care may be ‘good’ value,” Subramanian wrote.