Strategists From Goldman to BofA Love One of S&P 500’s Laggards

  • Health-care most favored industry recommendation at 11 banks
  • Bullishness not embraced by investors as stocks lag this year

One of the worst-performing industries in the S&P 500 Index happens to be the favorite of stock strategists.

Following a five-year reign leading the U.S. equities market, health-care companies are on pace for their weakest year of performance since 2010, dragged down by the biggest plummet for biotech stocks in more than a decade. That’s done little to deter the sellside crowd, with strategists at 11 banks tracked by Bloomberg conferring their most bullish recommendations on the group.

After more than tripling between March 2009 and the end of last year, shares of health-care companies are being squeezed as investors reach for stocks with sturdier defensive credentials and sell the group’s riskiest components, biotech. The S&P 500 Health-Care Index sits 2.7 percent below an all-time high from last July, and its valuation of 21.7 times earnings is 2.4 percent less than its one-year average, the second-smallest premium in the S&P 500.

“One of the reasons people like health-care is because certain areas within the sector haven’t performed well and it’s a place where they can try to find some value,” said Ernie Cecilia, chief investment officer at Bryn Mawr Trust Co., which oversees $8.5 billion in Bryn Mawr, Pennsylvania. “It’s a sector that’s not only underperformed the market year-to-date, but also has defensive characteristics to it.”

Calling it the “inexpensive defensive sector,” Bank of America Corp. ranks health-care as its most preferred overweight recommendation, according to recent reports written by chief equity strategist Savita Subramanian. Strategists at Barclays Plc and JPMorgan Chase & Co. are advising investors to own health-care stocks in favor of consumer staples, either in a long-short strategy or by taking profits in the consumer shares to invest in health-care companies.

At other banks, the group stands out as among a select few market favorites. Health-care and consumer-discretionary stocks are the only bullish recommendations proffered by Sean Darby, chief global equity strategist at Jefferies Group LLC. Similarly, the group is one of three “overweight” industry allocations by David Kostin, Goldman Sachs Group Inc.’s chief equity strategist.

It’s not altogether surprising that health-care has re-emerged as a strategist favorite, said Jason Pride, the Philadelphia-based director of investment strategy at Glenmede, which oversees $30 billion. He cited the duration of the economic expansion and the bull market, which at seven years is the second-longest in history. The S&P 500 rose 0.2 percent Thursday, within five points of an all-time high.  

“The likelihood is at some point we’ll hit a weak spot and risks are higher because valuations across the entire market are higher,” Pride said. “So we think that justifies positioning in defensive equities.”

Meanwhile, the prospect for profit growth is the most robust among the S&P 500’s groups. Large-cap health-care stocks are forecast by analysts to increase earnings by almost 29 percent this year, triple the outlook for the broader market.

Such characteristics underscore strategists’ bullishness, even as those who manage money are more tepid about this industry. Health-care placed sixth in a ranking of the S&P 500 industry investors expect to outperform the market in the next 12 months, according to a survey by Scotia Capital Inc. The stocks also experienced the biggest decrease in mutual fund positioning of any group during the past 12 months, according to data compiled by Bank of America.

“The waning investor sentiment has been driven by generic drug pricing pressures, antitrust concerns, currency, uncertainty around legislation and uncertainty around the U.S. presidential election,” Subramanian wrote in a July 11 report.

When it comes to the U.S. election in November, there’s reason for investors to be cautious about some health-care stocks, Cecilia said. After all, in September, Hillary Clinton added fuel to a two-month, 27 percent selloff in the Nasdaq Biotechnology Index after she tweeted about “price gouging” for prescription pills.

Nuances within the broader group aren’t necessarily captured by all strategists, helping to explain why investors seem less bullish, said Frank Cappelleri, executive director at Instinet LLC in New York. “There seems to be a dichotomy between biotechs and the other supposedly lower-octane names.”

Pride agrees. “To some degree I think you have a hard time grouping health-care as one big sector that has one single attribute. There are bits and pieces of it that are very different.”