Medical device stocks are often seen as growth names and richly valued relative to the broader healthcare sector, traits that may not appear advantageous in the current market environment. However, ETFs, such as the iShares US Medical Devices ETF (IHI), maybe offer investors pleasant surprises due to low exposure to China.
IHI seeks to track the investment results of the Dow Jones U.S. Select Medical Equipment Index composed of U.S. equities in the medical devices sector. The underlying index includes medical equipment companies, including manufacturers and distributors of medical devices such as magnetic resonance imaging (MRI) scanners, prosthetics, pacemakers, X-ray machines, and other non-disposable medical devices.
“Diagnostic companies have been under pressure, although to a lesser degree than the broader market. Firms that have touted coronavirus tests like Quest Diagnostics Inc. and Laboratory Corp. of America Holdings have withstood downward market pressure while smaller peers like Co-Diagnostics Inc. and Opko Health Inc. have seen investors rush in driven by hopes that they would benefit from potential mass testing,” reports Bloomberg.
Looking Inside IHI
Industry observers argue that medical technology companies can tap into increased healthcare spending among emerging economies while the U.S. market has matured and could experience slower growth. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.
“Evercore ISI said companies like Quest and LabCorp may benefit from testing demand but that could be offset by fewer visits for unrelated routine and elective care. Jared Holz, a health-care trading specialist at Jefferies, expressed caution on toolmakers and pointed to impacts related to slowing demand in China,” according to Bloomberg.
Recent declines for some IHI components could an important end: knocking down valuations that appeared rich heading into 2020.
Valuations on the S&P 500’s sector allocation look compelling. Furthermore, the healthcare sector appears cheap relative to the broader market as this segment has underperformed the run in the S&P 500. Healthcare stocks were among the second weakest performers among the 11 major sectors on the benchmark index. Looking ahead, healthcare companies are projected to generate annual earnings of 9% and revenue growth of 14%, the highest of all sectors in the S&P 500, according to FactSet data.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.