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“We see healthcare as a safe-haven in a world with elevated geopolitical risks, high inflation and decelerating global growth.”
That was JPMorgan strategists, restamping a bullish rating on the sector they say offers defensive growth, high margins and pricing power, and attractive shareholder yield at a reasonable valuation,” of 16 times forward earnings versus 20 times for the S&P 500
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“After an average 54% drawdown for Russell 3000
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healthcare constituents with around 24% of stocks down more than 80% over the past year, we see healthcare investor sentiment as poor and washed out,” said a team led by Dubravko Lakos-Bujas in a note to clients that published Tuesday.
Such declines have been worse than the average 25% drawdown across markets, largely because of the sector’s exposure to early-stage stocks, said the strategists. Roughly 23% of Russell 3000 healthcare stocks have “little or no trailing revenues” versus around 1% for the index excluding that sector, they noted.
“In our view, the aggressive Fed Pivot in recent months has been a key catalyst for the boom and bust of growth names within the sector,” said the JPM team. That’s as equity capital market activity for healthcare has more or less ground to halt, especially for higher-beta subsectors.
With the outlook for healthcare innovation unchanged, waning enthusiasm for those stocks have driven sector valuations to the cheapest in years — cheaper than defensive peers and growth peers, said Lakos-Bujas and the team.
“On the hypergrowth side, S&P Biotech
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collapsed by 44% relative to the market from 52W [52 week] highs representing the largest underperformance on record and even below previous cycle lows,” for example between 2009 to 2010 and 2015 to 2016.
Healthcare has been in secular growth — expansion regardless of what’s happening in the economy — for several decades thanks to an aging and growing middle-class population, said JPM strategists. That’s as expenditures on healthcare have risen to 16% of total personal consumption from 5% since the 1950s. Food and beverage expenditure, meanwhile, has dropped to 8% from 21% in the same period.
Such expansion has driven compound average growth rate {CAGR} for the healthcare sector of 9%, the strongest such growth for all sectors since the Great Financial Crisis. That’s versus CAGR of 4% for the S&P 500, the strategists.
“While rising energy and inflation costs could be a concern for crowding out healthcare spending in the short term, demographic trends, excess savings, and rising wages all suggest otherwise. Based on consensus estimates, healthcare is expected to generate healthy mid-single-digit revenue growth this year and next,” said Lakos-Bujas.
Also on the side of healthcare is pricing power, a metric highly valued on Wall Street at the moment, given surging inflation. Healthcare enjoys tech-like margins, apart from services, that are higher than defensive peers. Those margins are more protected during periods of higher costs and inflation, given the sector relies on neither agriculture nor energy inputs.
And most healthcare industries are earning 20% plus margins owing to patent protection and scale, while biotech and pharma generate 38% and 30% margins, the strongest of all among S&P 500 industries, said the strategists.
The potential for gridlocked coming midterm elections could also be a positive for the sector that is often a political target, said the JPM team.
