The healthcare sector is usually viewed as defensive, but that doesn’t diminish the possibility that the Health Care Select Sector SPDR ETF (NYSEArca: XLV) will deliver some upbeat earnings news when reports from the sector trickle in over the coming weeks.
The largest healthcare ETF by assets, XLV seeks investment results that correspond generally to the Health Care Select Sector Index. The index includes companies from the following industries: pharmaceuticals; health care equipment & supplies; health care providers & services; biotechnology; life sciences tools & services; and health care technology.
“Sentiment is improving due to what the full-year and quarterly results are projecting: The Health Care sector is projected to post a minor 0.4% decline in earnings for Q3 with a 4.7% increase in Q4, making it one of only four sectors to have positive EPS growth in 2020,” writes Matthew Bartolini, head of SPDR Americas Research.
XLV: Beating Expectations
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.
“Revenues are also expected to be positive, reaching the highest level of any sector across the Q3, Q4 and 2020 time periods,” notes Bartolini.
Of course, investors considering XLV and healthcare exchange traded funds need to stay engaged with electoral results.
“While fundamental risk is low for the Health Care sector, macro risk is high. It is one of the sectors potentially in play based on election policies,” according to Bartolini. “It could also be impacted by the nomination of Amy Coney Barrett to the Supreme Court. The week of the likely date of the floor vote (October 23) plus the week following will coincide with earnings reports from 57% of S&P 500 Health Care firms.”
Another reason to consider mature healthcare companies, including those found on XLV’s roster: they have few, if any, unprofitable quarters, and they have a cash hoard on their balance sheets to buffer against economic contractions and rough markets.
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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.