By Lewis Krauskopf
NEW YORK (Reuters) - U.S. healthcare investors have found success this year buying stocks of companies whose products improve eyesight, treat pets and fix crooked teeth, all viewed as unlikely to fall victim to political and regulatory issues pressuring a wide swath of the sector.
The S&P 500 healthcare sector overall has underperformed the broader stock market this year. But a number of companies have posted standout returns even as healthcare reform and prescription drug pricing loom as hot topics with the 2020 presidential election campaign heating up.
“The reason that people have been gravitating toward names like these is they feel more comfortable that they are less susceptible,” said Teresa McRoberts, a portfolio manager who focuses on healthcare at Fred Alger Management in New York.
"People are trying to stay away from anything that is viewed as susceptible to headline risk."
The healthcare sector, which accounts for 14% of the S&P 500 benchmark stock index, is due for another test later this month, when the Democratic Party holds its first presidential debates.
Healthcare is poised to be a prominent issue, with left-leaning candidates embracing government-run Medicare for All plans. At the same time, the high cost of medicines has drawn attention from Democrats as well as President Donald Trump and his Republican party.
So far this year, the S&P 500 healthcare sector has climbed 5.5%, well below the roughly 15% return for the overall S&P 500.
(Graphic: How healthcare stocks stack up in 2019 link: https://tmsnrt.rs/2XdKqGU)
Shares of many health insurers, pharmaceutical and biotechnology companies, and pharmacy services companies have lagged.
But a number of large-cap healthcare stocks have thrived in 2019, generally benefiting from factors specific to their businesses as well as from their place away from the political glare afflicting others in the sector.
For example, shares of Mettler-Toledo International and Thermo Fisher Scientific (NYSE:TMO), which specialize in equipment used for drug development and research laboratories, are up 43% and 27.5%, respectively. Shares of animal health company Zoetis Inc (NYSE:ZTS) have climbed 30%, while contact lens company Cooper Cos Inc has seen its stock price jump 29%.
(Graphic: Healthcare stock winners and losers in 2019 link: https://tmsnrt.rs/2R7zsgm).
In general, life-science tool makers, medical device companies and animal health firms are "all higher growth and they all have low healthcare reform risk," said Martin Jarzebowski, sector head of healthcare for Federated Investors.
"Those two things in combination mean that those best-performing names are safe havens amid both economic and regulatory uncertainty," Jarzebowski said. "That’s the glue behind all of them."
Earnings for S&P 500 healthcare companies are expected to rise by 6.2% in 2019, according to IBES data from Refinitiv, more than twice the 2.7% earnings growth expected for the S&P 500 overall, despite the market's strong performance this year.
(Graphic: Putting up profits in healthcare link: https://tmsnrt.rs/2X1OcTB).
Two of the three top-performing S&P 500 healthcare stocks so far in 2019 are in the dental space. Shares of Dentsply Sirona Inc and Align Technology Inc have jumped 53% and 49%, respectively in 2019. Shares of biotechnology company Celgene (NASDAQ:CELG) are up about 51% this year because it is being acquired by drugmaker Bristol-Myers Squibb (NYSE:BMY). Bristol, by comparison, is down 9% this year.
Dentsply Sirona, which makes an array of products found in the dentist's office, is a "turnaround story" after a rough 2018 for the shares, said William Blair analyst John Kreger. New products and a solid first-quarter report have helped the stock, he said.
Align Technology, which specializes in clear aligners that straighten teeth, saw its shares sell off late last year with tech and growth stocks as the market swooned. Along with those other stocks, shares of Align are rebounding as they also benefit from lessening concerns about competitive price pressures, Kreger said.
"No one is really talking about reforming dental and how dental is provided," Kreger said. "The idea is you can get the growth potential without the regulatory uncertainty or the political uncertainty."
Healthcare's overall sluggishness this year means the sector looks relatively cheap. It now trades at 14.8 times forward earnings estimates compared to 16.2 times for the S&P 500, according to Refinitiv data. The sector and the broader market began the year with similar valuations.
(Graphic: Healthcare stock valuations link: https://tmsnrt.rs/2Rh9FCv).
Healthcare, a topic that helped Democrats regain control of the House of Representatives in the 2018 elections, is likely to come into the spotlight when a crowded field of Democratic candidates meet on June 26 and 27 for the party's first presidential debates.
Former Vice President Joe Biden, who tallied the most support in a Reuters/Ipsos poll released earlier this month, is seen by investors as likely to back more moderate healthcare reform efforts than left-leaning candidates, such as U.S. Senator Bernie Sanders of Vermont.
Should Sanders, who advocates Medicare for All, or other candidates with similar views gain more prominence, the healthcare sector could face increased pressure.
"I think there’s more potential downside to the debates," McRoberts said.