Today we will review US Health Care stocks with an eye on 2 issues.
- The first relates to the US election’s effect on the group. Senator Sanders, who envisions remaking American healthcare, is still in the lead to win the Democratic Party nomination on PredictIt.org (46% odds versus 2nd place Michael Bloomberg at 24%).
- The second point is whether the coronavirus has had any effect on the sector’s performance YTD.
Here is a breakdown of the group’s performance YTD and over the last year:
- Large Cap Health Care: +1.7% YTD, +15.9% 1-year
This is worse than the S&P 500, +3.8% YTD and +23.8% 1-year
- Small Cap Health Care: +4.3% YTD, +15.0% 1-year
This is better than the S&P 600 Small Cap Index, -1.5% YTD and +7.5% 1-year
- Worth noting: over the last 12 months small cap and large cap Health Care returns are also identical.
Bottom line: small cap healthcare has been the place to be so far in 2020 and will likely remain so. First, they are less likely to be in the crosshairs of any Presidential political debate. Second, they are more likely to be “Growth” stocks rather than “Value”. Just over three quarters (76%) of small cap Health care falls into the Growth bucket, versus 68% for large cap Health Care. As we have been discussing from various vantage points of late, “Value” investing is still in a protracted winter.
Now, let’s look through the various subsectors of Health Care:
- S&P Biotech Index: +1.9% YTD, +17.2% 1-year
- S&P Health Care Services: +4.2% YTD, +9.8% 1-year
- S&P Health Care Equipment: +1.9% YTD, +14.6% 1-year
- S&P Pharmaceuticals: +3.6% YTD, +17.4% 1-year
The bottom line here: since these indices all dig deeper into the market cap league table than just “Large Cap Healthcare”, all have outperformed the S&P 500 index for the group. As far as political impact, we note that “Services” – where insurance companies reside – have seen the greatest outperformance this year. This bears watching as a sign about how stock investors are handicapping a Sanders nomination or win by President Trump.
Lastly, there are 3 individual names we see mentioned as viable “virus plays”:
- Moderna (MRNA): +20.9% YTD, +31.5% 1-year. The company received a grant to develop a genetically based vaccine last month (we covered that in our Disruption section back then). Buzz around this name is dying down, however, over concerns that even its speedy development process will be too slow to develop a vaccine before quarantines and other actions limit the spread of the disease.
- Inovio (INO): +5.5% YTD, -24.5% 1-year. Another grant recipient.
- Gilead (GILD) +6.2% YTD, +2.3% 1-year. Chinese health researchers are trialing one of its drugs – a failed Ebola treatment – on coronavirus patients. The Wuhan Institute of Virology, however, has applied for patent for this use case so GILD is unlikely to benefit financially.
As far as what all this means from an investment standpoint:
- Health Care is a tough group to like in 2020. Even if the Democrats end up choosing Michael Bloomberg or another centrist candidate, American health care costs will be a front-and-center issue during this year’s campaign season.
- It is unlikely that any US company will directly benefit from developing coronavirus treatments or vaccines. China’s coopting of Gilead’s drug shows why, and 99% of all cases reside in that country. As we mentioned in our Disruption section during the Davos conference, the upside for any Western company finding a quick solution will be to validate its core abilities rather than immediately address the outbreak.
- As a rule, small cap Health Care stocks are a better bet than their larger brethren since they are more often “Growth” rather than “Value”.