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Health Care Check-Up

We continue to recommend overweighting the S&P 500 Health Care sector.

The S&P 500 Health Care sector is up 23.5% year to date through December 12, which is the best performance of all 10 sectors in the 500. What’s more, Health Care’s five year compound annual growth rate of 17.0%, second only to Consumer Discretionary’s 18.7%, is well above the S&P 500’s 12.4%. As the calendar moves closer to the New Year, investors are wondering if it is time to take the money and run by lowering their weighting toward this stalwart sector. We say no. Let this winner ride based on both technicals and our fundamental outlook for the group.

  • The Trend Remains Our Friend: Currently, we see that both absolute and relative trends remain our friend, as they are above their 13- and 26-week moving averages.
  • Solid EPS Growth Expectations: The S&P 500 Health Care sector is projected to record a 14.7% growth in operating EPS in 2014, according to Capital IQ consensus estimates, versus a 7.0% rise for the S&P 500. Estimates for 2015 are equally encouraging at 11.8% for the sector versus 8.2% growth for the overall market.
  • Acceptable Valuations: The S&P 500 Health Care sector’s P/E on Q4 2014e EPS is currently trading at a 12% premium to the S&P 500’s Q4 2014e EPS, which is equal to the median multiple for this sector since Q4 1995. Therefore, history indicates that the group is currently neither undervalued nor overvalued from a relative perspective.
  • Recommendations: S&P Capital IQ equity analysts still think there are investment opportunities in Health Care, as they currently rank 32 stocks “Buy” and 12 “Strong Buy.”

So, there you have it. We continue to recommend that investors overweight their exposure to the S&P 500 Health Care sector, as 1) the price-performance trends remain our friend, 2) the sector, and a majority of its sub-industries, are projected to record above-market EPS growth rates, and 3) valuations are not off-putting. But just as with all recommendations, there are concerns. We therefore suggest you monitor MarketScope Advisor for any changes in our diagnosis.

Follow Sam on Twitter: @StovallSPGlobal

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