Health care stocks have been the stealth performers, and they will likely continue to outperform because of steady earnings, a favorable macro environment and cheap valuations, says Merrill Lynch's Brian Belski.
Belski, U.S. sector strategist, has been recommending overweight in health care, along with IT, and consumer staples. Today, he issued a note on the health care group, calling it a "safety net." He says it's the only sector to show positive price performance of the past three months with over a 1 percent return.
In fact, the group is today's top performer, with the S&P health care group up 0.61 percent in a mostly down market in late morning trade. Top performers today include Humana , Cigna , Aetna , Wyeth , Amgen , Bristol-Myers and Johnson and Johnson . Health care has consistently been pointed out by strategists over the past couple months as a good area to mine because the valuations are so low.
"While we acknowledge the sector has been "cheap" for quite a long time, we would also note that levels have not been this low since 1994, a period that preceded a major wave of consolidation and renewed growth within the sector," Belski wrote.
Belski said in 1994 it was pharmaceuticals that were involved in mergers but this time consolidation will be focused on medical devices, biotech and life sciences industries.
Health care's performance after the 1994 trough outpaced the S&P significantly. After one month, it was up 10.9 percent, to the S&P's 3.9. After three months, it was up 14.5 percent to S&P's 3.1 percent. Twelve months later health care was up 46.6 percent, to the S&Ps 22.7 percent, according to Merrill Lynch.
Belski points out health care is one of the few areas that has had double digit earnings growth over the last couple quarters and it will still grow moderately in coming quarters.
"Political rhetoric" is fading for now, Belski said. We know it overshadowed the group this election year, particularly during the primaries. It is now "taking a back seat to other pressing issues like the Economy, Energy, Housing and the U.S. interventions in the Middle East, in our view," he wrote.
He also says pricing is improved in several areas, especially pharma, and that employment trends favor the sector.
Health care should also benefit as the earnings power of recent market leaders, like energy and materials, slows. Investors have changed their focus to stocks that will show consistent earnings growth, he said.
Merrill's picks in the group include Celgene , Johnson and Johnson, Medtronic and Thermo Fisher . (Merrill or its affiliates are market makers in these stocks and the firm has or could have a business relationship with them.)
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