Repeal of the Affordable Care Act has placed health-care investors at risk. But there are parts of the U.S. health-care system that President Donald J. Trump plans to shake up, which may present buying opportunities. Currently, health stocks are underpriced compared to other sectors of the market.
"We're investing in a time of substantial uncertainty," said Marshall Gordon, director and senior research analyst at ClearBridge Investments. "Everybody is searching around for what might happen."
Thanks to the uncertainty, the broad health-care stock index has fallen by nearly 6.3 percent since last August, but it is up more than 3 percent since the election. The sector, which has tended to trade at a premium to the S&P 500, is about 10 percent cheaper than the benchmark, noted Brad Sorensen, managing director of market and sector analysis at Charles Schwab.
"It's not major, but when you look at the rest of the sectors, that does make it pretty attractive in a market where it's tough to find good value," he said.
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The biotech sector, in particular, has seen its P/E come down from its 2015 peak. The S&P 500 health-care sector forward PE is 14.9 compared to its historical average of 19.3 over the last 20 years. The NASDAQ Biotech Index is trading at 34 times forward PE compared to 49.8 since 2009.
This is not due to a lack of growth — it's been one of the better stories over the past decade in terms of earnings growth — but concerns about sector valuation amid regulatory scrutiny, said Joe Abbott of Yardeni Research. He thinks the sector remains a good opportunity.
This week's meeting between Trump and drug company CEOs is a good example of the volatility that will move stocks — up and down — as the government begins to make changes.