JPMorgan told clients to buy health-care stocks and sell staples shares because income investors will rotate into more reasonably valued parts of the market that still have sturdy dividend and earnings growth.
"Similar to Low Vol (relative to Value), staples appears to be in a bubble (relative to Healthcare) after outperforming by 20 percent in the past year and it trades at a record valuation spread of more than 5x turns on PE NTM," JPMorgan U.S. equity strategist Dubravko Lakos-Bujas wrote in a note Tuesday. "We believe staples has become crowded during this cycle after a rotation triggered by the Fed turning more dovish, zero rates abroad, and stabilizing USD."
He upgraded the health-care sector to overweight and downgraded the staples category to underweight on "a convergence sector trade."
Staples has a forward P/E valuation of 22 times versus the health-care sector at 16.5 times, according to the strategist.
Lakos-Bujas doesn't believe the valuations are "justified by the fundamentals" as staples historically trade at a discount to health care on lower growth prospects and profit margins. Health-care stocks are currently estimated to increase sales in the coming year 6.4 percent versus staples at 3.8 percent, according to Lakos-Bujas.
"Drug pricing headlines and political rhetoric have been drivers of health-care sector underperformance over the last year. ... We see limited read-through to business fundamentals as successful reform would require considerable alignment in Washington. We recommend using any headline related pullbacks to add Healthcare exposure," the report said.
Here are seven of the top health-care picks from JPMorgan.