Worst-Performing Stocks of 2016: Health Care - Wall Street Journal
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Unexpected results in Tuesday’s U.S. elections could upend a stable stock market. For health-care stocks, though, any outcome might prove cathartic.
Health-care stocks are the worst-performing sector in the S&P 500 so far this year, with shares down 7.7% compared with the broader index’s 2% gain as investors fretted about everything from Obamacare to drug prices.
Several investors and analysts said they expect a clearer view of the political outlook for insurers and drug companies after the presidential election. Both Republican nominee Donald Trump and Democrat Hillary Clinton have criticized drug prices and want to make adjustments to the health-care system. While a one-party sweep of the presidency and Congress could spur more selling, by increasing the possibility of legislative action, many say that such risks have been overblown.
“The reaction of many in the marketplace right now has been to flat out sell health care, and I do think that’s a little bit of an overreaction,” said Jim Tierney, chief investment officer for concentrated U.S. growth at AllianceBernstein, who has increased his health-care holdings since the beginning of the year. “There are winners, and even the winners have been beaten down, so there is a good opportunity for those who can execute.”
Worries that policy makers could impose drug-price controls have dragged down biotechnology shares, and the Nasdaq Biotechnology Index has fallen roughly 26% in 2016. When Mrs. Clinton said in a Sept. 21, 2015 tweet that she would outline a plan to take on “price gouging” by certain specialty-drug makers, the index fell 4.4% that day.
Meanwhile, more defensive stocks, such as Johnson & Johnson or Merck & Co.—which have benefited this year with investors nervous and seeking dividends and income—are both up more than 11%. The life-and-health-insurance subsector of the S&P 500 has risen 5% so far this year.
Some of the biggest health-care companies offer investors yield, with a sector valuation that is less stretched than other yield-producing segments of the market, such as utilities stocks.
Health-care shares in the S&P 500 are trading at 19.1 times their past 12 months of earnings, in line with the overall index, according to FactSet, and down from health care’s 22.5 price/earnings ratio a year ago. Utilities shares are trading at 21.8 times earnings. Merck has an annual dividend yield of 3.1% and Johnson & Johnson provides a dividend yield of 2.8%, both of which exceed the average dividend yield of 2.2% for the broader S&P 500, according to FactSet.
It isn’t the first time that health-care stocks have declined heading into an election. The biotech index has pulled back ahead of the past five presidential elections, including 2016, according to research by RBC Capital Markets. In the past four elections, it then rallied 10% to 15% from the election through roughly the next three months.
From the night of President Barack Obama’s election in 2008 to the end of this October, the sector rose 143%, ahead of the S&P 500’s 111% gain. Health-care stocks reported the third-largest earnings growth of the 11 sectors in the S&P 500 for this year through October, according to FactSet.
The life-and-health-insurance subsector of the S&P 500 has risen 63% over the past eight years through the end of October.
Biotech stocks, while struggling this year, were a main driver of the broader health-care sector’s rise in the past eight years; the Nasdaq Biotechnology Index has climbed 256%. The gains coincided with a rise in innovation and an increase in new drug approvals by the Food and Drug Administration. The FDA approved 45 novel drugs in 2015 and 41 in 2014, compared with an average of 25 annually from 2005 to 2013, according to the agency.
Still, there are signs of strain.
Amgen’s stock fell 9.6% on Oct. 28 after the drugmaker said it wouldn’t be able to charge much more next year for Enbrel, its blockbuster rheumatoid-arthritis treatment. McKesson shares tumbled 23% that same day after the health-care giant cut its profit outlook for the year; it was the lowest close for the stock since 2013, and its biggest one-day percentage decline since 1999.
California voters are set to vote on a proposed law that would mandate that state agencies pay no more for prescription drugs than the price paid by the U.S. Department of Veterans Affairs. The federal agency by law receives steep discounts from a given drug’s list price and is empowered to negotiate prices further.
Also, this summer, the Justice Department sued to block Anthem Inc.’s proposed acquisition of Cigna Corp. and Aetna Inc.’s planned tie-up with Humana Inc. Shares of all four companies are down in 2016. U.S. health-care merger-and-acquisition activity totals $161 billion so far this year, down 59% from a year ago, according to Dealogic.
No matter who wins the presidential election, some investors are skeptical that plans to curb drug prices would be implemented, especially if there is a divided government, which many anticipate.
“I think if Clinton wins, but the House and Senate are mixed, you buy the selloff,” said David Klaskin, chief investment officer of Oak Ridge Investments. “People are so afraid of what’s coming, but they ignore that these companies have outstanding prospects for business development.”
Demographic trends also suggest strong future earnings and growth for health-care companies. A 2015 study by the U.S. Census Bureau found that, with global populations aging, a challenge for governments in coming years will be to slow the growth of health and long-term care spending as a percentage of gross domestic product.
Health-care companies “grow faster than staples, they grow faster than utilities, and they’re trading at lower multiples,” said Tony DeSpirito, portfolio manager for BlackRock Equity Dividend Fund, which is overweight health care, primarily health-maintenance organizations and diversified pharmaceutical companies. “Health care continues to grow as a percentage of GDP, so that’s a good backdrop.”
—Akane Otani contributed to this article.
Write to Aaron Kuriloff at aaron.kuriloff@wsj.com and Corrie Driebusch at corrie.driebusch@wsj.com
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