3 reasons healthcare is showing fit performance

-- | 09/07/2020

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Damien Conover: Today, we're talking about the outlook for the healthcare sector. And the sector has had some nice performance over the trailing 12 months. It's up close to 12 per cent versus the overall market, which is only up about 8 per cent. And a lot of this has come just in this recent rebound in the second quarter, as the investors have felt more confident in the overall market getting through the challenges of the coronavirus. 

For healthcare, specifically, I'd call out three key fundamental factors driving some of the returns. First off, we're seeing good underlying fundamental research and development that really drives a lot of the stock returns for these different companies.

Second, these companies are very well positioned moving into potential policy reform. So in the United States, as we come closer to an election, there's always concern that new potential elected officials could make major policy reform. With Joe Biden, the likely Democratic nominee for president, it's likely that either he or Trump will probably not institute major healthcare reform, which is probably a good thing for stocks within the healthcare sector.

And then the last point I'd make here is that within the coronavirus, there is a defensive nature of healthcare companies, and these companies should hold up reasonably well despite any of the economic fallout from the coronavirus. 

From a valuation perspective, we are looking at the healthcare sector right now as slightly overvalued. However, we do see more attractive valuations within the large-cap pharmaceutical stocks and the managed-care organisations. What I'd say about the large-cap pharmaceutical stocks in particular is these companies tend to do very well regardless of the economic backdrop. And within the coronavirus challenges, people are still going to need to take their medicines. We think two companies in particular are well-positioned, Bristol-Myers and Merck. Both of these companies focus on oncology drugs. These are drugs that people will put a high priority on getting, and these drugs tend to hold up very well with pricing power.

One of the last notes I would make here is when we think about the challenges of the coronavirus and we think about the companies that could help get the world out of these challenges, the large pharmaceutical companies are really some of the key players in this ability to return us back to normal.

In particular, there's a lot of vaccine development going on right now. Five leading companies are all from the large pharmaceutical companies, and while these companies have messaged that they don't anticipate charging very much for these vaccines, so we don't think they're going to get a lot of cash flow from vaccines, these firms will likely be able to redeploy the goodwill generated from bringing out a vaccine to the overall market, and that again will likely reduce the challenge that some of these firms face in pricing drugs outside of the coronavirus. And this goodwill, we think, will help strengthen the overall pricing power for other drugs and really uplift the wide moats that we see in the large pharmaceutical space.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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