Healthcare stocks and the related exchange traded funds (ETFs) have been having a rough go of it this year and that turbulence was on display last week when the Health Care Select Sector SPDR ETF (NYSEArca: XLV), the largest exchange traded fund (ETF) dedicated to the sector, lost more than 4%, notching its worst weekly performance since December.
The healthcare sector, though, remains a brighter spot in the earnings landscape. Health-related companies are expected to report the second highest profit growth of the benchmark S&P 500’s 11 sectors for the first quarter, rising 4% year-over-year, according to FactSet.
Investors embraced healthcare stocks for the sector’s growth and defensive characteristics, providing investors with yields and valuations that are less stretched than other yield-producing stocks like utilities. Some market observers believe the sector’s selloff is overdone and that healthcare stocks could be poised to bounce back.
“Because this latest move was largely caused by political hot air (so to speak) and not something structural within the sector, I think we could see a bounce back in some of these names,” Andrew Thrasher of Thrasher Analytics said in a note to clients, reports CNBC. “I believe the stocks have been over-extended to the downside.”
Under Political Pressure
Earlier this month, some healthcare stocks came under pressure following a Congressional hearing on high drug prices. Some investors argued that the health-care sell off was mostly driven by the proposed legislative changes to Pharmacy Benefit Managers’ business model, which are paid rebates by Big Pharma for drugs coverage under private and public insurance plans, such as Medicare. Lawmakers suspect the so-called backdoor deals have increased drug costs for patients.
The sector has also been hampered by speculation that whomever the Democratic 2020 presidential nominee is will be a candidate that favors Medicare for All.
“Health care’s sharp drop comes as investors worry that left-leaning policy ideas such as universal health coverage are gaining support, which could hinder corporate profits for companies in the space,” according to CNBC.
Two-thirds of the S&P 500 Health Care Index reports earnings over the next weeks, so there are earnings-driven opportunities for the sector to get out of its funk.
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