The market has fixated on a few sectors this year. It seems to have forgotten about healthcare -- making many names in the sector look attractive.
The markets favorite sectors this have been energy, technology, and industrials. They're all outperforming the S&P 500's 13% gain this year, with oil producers benefiting from higher crude prices, and tech companies and industrial manufacturers reaping the rewards of exploding data-center demand. Chip stocks in particular have exhibited high volatility but have seen buyers aggressively step in, sending them higher this week.
In their preoccupation with those sectors, investors have left healthcare alone. That's what new buyers in the sector want to see, because it leaves the stocks with plenty of potential for gains.
Let's take a quick look at the recently poor performance that has left the sector looking attractive. The State Street Health Care Select Sector SPDR exchange-traded fund, home to the major health insurers, drug makers, and medical-device makers, is up only about 6% this year compared to the S&P's 13%. That leaves its share price near the far low end of its 10-year range as a ratio to the S&P 500, according to FactSet data.
That's partly because money managers do not own much of the sector -- meaning they have room to increase their exposure if they see signs of business strength. At the end of July, portfolio managers that Deutsche Bank strategists surveyed had allocated a percentage of their funds to healthcare that was at the lower end of the range since 2009.
So the lack of interest in the sector likely can't worsen much more. "Healthcare is oversold, under-owned," says Jason Ware, chief investment officer at Albion Financial Group. "Washed out? Yeah, probably."
That means buying now makes sense for longer-term investors. The healthcare ETF has seen earnings per share grow almost 8% annually from 2012 through 2025, partly driven by an aging population and new treatments and solutions for heart and other ailments, all of which has increased patients' demand for healthcare goods and services. And it's a defensive sector -- one that won't see a hit to demand if the economy stumbles or data center demand dries up.
So we searched for healthcare stocks that have remained below their record highs so far in August and have analysts forecasting EPS growth for each of the next two years. Some of the bigger names in this bucket include Eli Lilly, Vertex Pharmaceuticals, and Gilead Sciences; medical-device makers Boston Scientific, Stryker, Intuitive Surgical, and Dexcom; insurers UnitedHealth Group, Cigna Group, and Humana; and drug distributor McKesson.
McKesson is certainly compelling. With almost $400 billion in 2025 sales, it's one of the dominant players in the drug and medical-product distribution business, which features only a few service providers. McKesson has long benefited from the aging population's demand for more treatments, which the company delivers to hospitals, pharmacies, and clinics. It's a highly reliable business for investors, who have grown accustomed to seeing it deliver great results; the company has beaten analysts earnings estimates almost 90% of quarters dating back to 2015.
It has plenty more growth to come. Analysts forecast 8% annual sales growth from the end of this year through 2030 to $579.4 billion, according to FactSet. That's achievable, as it's not far off from the company's long-term historical trend of high single-digit growth.
Analysts expect EPS to grow 15% annually in that period. For one thing, McKesson consistently repurchases stock -- which reduces the share count -- and it can continue to do so, given its plentiful cash on hand. And it has net debt, or debt minus cash, of only a little over $1 billion -- easily covered by its roughly $7 billion in annual earnings before interest, tax, and non-cash expenses.
The resulting EPS growth can drive the stock higher. Shares trade at just over 18 times the next 12 months' earnings, an almost 11% discount to the S&P 500. That discount is right around the middle of the range in the past five years, so the stock is likely priced reasonably. If earnings continue to grow, the stock should gain.
McKesson has a chance to prove its worth when it reports 2027 fiscal year first-quarter earnings after the closing bell today.
Chris Shaffer, managing partner at Talaria Capital Management, is sticking with McKesson, given the stock's low price, his confidence in management, and its plans to continue stock buybacks.
Take a look at McKesson -- and the rest of the sector.
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