Health care stocks have plunged from their recent highs on a variety of concerns, but this has created opportunities for bargain-hunting investors, according to research by Raymond James Financial Inc. (RJF), as reported by Barron's. Among their top picks in the sector, per Barron's, are these 12: Abbott Laboratories (ABT), Becton Dickinson & Co. (BDX), CVS Health Corp. (CVS), UnitedHealth Group Inc. (UNH), Vertex Pharmaceuticals Inc. (VRTX), Mylan NV (MYL), Sage Therapeutics Inc. (SAGE), Teligent Inc. (TLGT), Spark Therapeutics Inc. (ONCE), OraSure Technologies Inc. (OSUR), PRA Health Sciences Inc. (PRAH) and Incyte Corp. (INCY).
The S&P 500 Health Care Index (S5HLTH) fell by 8.0% from its recent high close on January 26 through the close on March 5, per S&P Dow Jones Indices. Abbott and UnitedHealth are among the 10 biggest constituents of that capitalization-weighted index. During this same period, the S&P 500 Index (SPX) as a whole declined by 5.3%. Meanwhile, the Investopedia Anxiety Index (IAI) continues to record very high levels of worry about the securities markets among our millions of readers around the globe.
For the 12 recommended health care stocks listed above, these are their one-year and year-to-date price moves, along with their current dividend yields and forward P/E ratios based on consensus EPS for fiscal 2018, as of the close on March 5, per Barron's:
- Abbott: +34% 1-year; +6% YTD; 1.9% yield; P/E 26
- Becton Dickinson: +18% 1-year, +2% YTD; 1.4% yield; P/E 20
- CVS: -16% 1-year; -6% YTD; 2.9% yield; P/E 11
- UnitedHealth: +36% 1-year; +4% YTD; 1.3% yield; P/E 18
- Vertex: +90% 1-year; +16% YTD; no dividend; P/E 55
- Mylan: -4% 1-year; -2% YTD; no dividend; P/E 8
- Sage: +161% 1-year; +3% YTD; no dividend; P/E -21
- Teligent: -59% 1-year; -26% YTD; no dividend; P/E 135
- Spark: +12% 1-year; +24% YTD; no dividend; P/E -20
- OraSure: +53% 1-year; -7% YTD; no dividend; P/E 63
- PRA Health Sciences: +43% 1-year; -7% YTD; no dividend; P/E 20
- Incyte: -32% 1-year; -4% YTD; no dividend; P/E -327
Sage, Spark and Incyte are estimated to report losses in fiscal 2018, leading to negative forward P/E ratios. Yahoo Finance P/E data was used for Sage in the absence of Barron's data for analyst EPS estimates. The forward P/E ratio for the S&P health care sector was 15.7 and that for the entire S&P 500 was 17.1 as of February 28, per analysis by Yardeni Research Inc.
Shocks to Healthcare Stocks
Some of the recent underperformance by health care stocks has been attributed to increasing speculation that Amazon.com Inc. (AMZN) is preparing to enter the retail pharmacy business, perhaps by making a bid for Rite Aid Corp. (RAD), Barron's notes. Earlier reports had revealed that Amazon has obtained wholesale pharmacy licenses in at least twelve states. (For more, see also: Eyeing Amazon, Albertsons to Purchase Rite Aid.)
Meanwhile, the largest hospitals in the U.S. are planning to form a nonprofit generic drug company in a move to combat high drug prices and shortages of some medical products, per an earlier report in Barron's. Shortly after that, Amazon announced that it would partner with Warren Buffett's Berkshire Hathaway Inc. (BRK.A) and banking giant JPMorgan Chase & Co. (JPM) to create a new health care company designed to reduce employee medical costs. This news also shook the health care sector. (For more, see also: Buffett, Bezos, Dimon to Found Healthcare Company.)