By Paul R. La Monica
GLP-1s are all the rage. So it should come as no surprise that shares of Mounjaro and Zepbound maker Eli Liily have soared nearly 60% this year. But the rest of the healthcare sector, while not morbidly sick, seems to be nursing a bit of a cold.
The Health Care Select Sector SPDR exchange-traded fund, trading under the ticker symbol of XLV, is up about 12% in 2024, compared with a more than 21% pop for the S&P 500 index. Lilly is the largest holding in the XLV, with a nearly 13% weighting. So its surge helps make up for the lousy performance of other big stocks in the ETF, such as Johnson & Johnson and Merck, which are flat this year.
But there is good news for the sector. Earnings are expected to increase 20% in 2025 following a 20% drop in 2023. Profits tumbled last year due to the end of the Covid-19 vaccine boom, which boosted Pfizer, Moderna, and others in 2021. "What you ended up with Covid was that the sector pulled forward three years of earnings into a single year," said Nicholas Codola, a senior portfolio manager at Brinker Capital. What's more, valuations are reasonable. The XLV trades for 18 times 2025 earnings estimates, a discount to the broader market.
There are other positive forces at play. Jay Kaeppel, senior research analyst at SentimenTrader, noted in a report that insider selling in the sector has plummeted lately. "This suggests that healthcare sector insiders still see further upside potential," he wrote. Seasonality is also in the sector's favor, with Jonathan Krinsky, chief market technician at BTIG, noting in a report that November is historically the best month for healthcare stocks. "We would be using any weakness to add to [healthcare] in anticipation of new highs into year-end," he wrote.
So what should investors be doing if they want a prescription for growth? Dan Chung, the CEO of Alger, advises looking beyond Lilly and rival Novo Nordisk, the European maker of Ozempic and Wegovy. He said at a recent media event that the "fascination" with the GLP-1 drugmakers is similar to the Magnificent Seven tech stocks of the Nasdaq.
But Chung thinks the rest of the sector looks attractive thanks to a one-two punch of aging populations in the U.S. and other developed markets, and continued innovation. "This is a large dynamic industry, and it is not as economically sensitive," he said. His firm owns genetic testing company Natera, medical robot giant Intuitive Surgical, and biotech Amgen, which is working on a GLP-1 shot that can be injected once a month instead of weekly.
Dan Lyons, a portfolio manager and research analyst at Janus Henderson, likes Amgen, too. He's also bullish on AstraZeneca, which has a strong cancer franchise and is developing a daily pill for weight loss, and Sanofi, the maker of Dupixent, which is used to treat asthma, eczema, and other inflammatory conditions.
Investors can also go the ETF route for broader exposure. In addition to XLV, Codola recommends the Invesco S&P 500 Equal Weight Health Care ETF $(RSPH)$ and Simplify Health Care $(PINK)$, an actively managed ETF. Net profits from the latter fund are donated to the Susan G. Komen breast cancer organization.
One last positive? The industry may no longer be a whipping post for politicians. The sector isn't getting as much attention as it did in 2016 and 2020 when the fate of the Affordable Care Act was a hot topic. "Healthcare is not as big an issue in this election," Lyons said. "We're likely to get a fairly divided Congress, which naturally limits major changes."
In other words, the gridlock scenario that Wall Street tends to prefer looks like just what Dr. Market ordered.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 10, 2024 02:30 ET (06:30 GMT)
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