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GRAPHIC-U.S. healthcare stocks shielded from political pressures prove profitable

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U.S. healthcare investors have found success this year buying stocks of companies whose products improve eyesight, treat pets and fix crooked teeth, all viewed as unlikely to fall victim to political and regulatory issues pressuring a wide swath of the sector.

By Lewis Krauskopf

NEW YORK, June 13 (Reuters) - U.S. healthcare investors have found success this year buying stocks of companies whose products improve eyesight, treat pets and fix crooked teeth, all viewed as unlikely to fall victim to political and regulatory issues pressuring a wide swath of the sector.

The S&P 500 healthcare sector overall .SPXHC has underperformed the broader stock market this year. But a number of companies have posted standout returns even as healthcare reform and prescription drug pricing loom as hot topics with the 2020 presidential election campaign heating up.

“The reason that people have been gravitating toward names like these is they feel more comfortable that they are less susceptible,” said Teresa McRoberts, a portfolio manager who focuses on healthcare at Fred Alger Management in New York.

"People are trying to stay away from anything that is viewed as susceptible to headline risk."

The healthcare sector, which accounts for 14% of the S&P 500 benchmark stock index .SPX, is due for another test later this month, when the Democratic Party holds its first presidential debates.

Healthcare is poised to be a prominent issue, with left-leaning candidates embracing government-run Medicare for All plans. At the same time, the high cost of medicines has drawn attention from Democrats as well as President Donald Trump and his Republican party.

So far this year, the S&P 500 healthcare sector .SPXHC has climbed 5.5%, well below the roughly 15% return for the overall S&P 500.

Shares of many health insurers, pharmaceutical and biotechnology companies, and pharmacy services companies have lagged.

But a number of large-cap healthcare stocks have thrived in 2019, generally benefiting from factors specific to their businesses as well as from their place away from the political glare afflicting others in the sector.

For example, shares of Mettler-Toledo International MTD.N and Thermo Fisher Scientific TMO.N, which specialize in equipment used for drug development and research laboratories, are up 43% and 27.5%, respectively. Shares of animal health company Zoetis Inc ZTS.N have climbed 30%, while contact lens company Cooper Cos Inc COO.N has seen its stock price jump 29%.

In general, life-science tool makers, medical device companies and animal health firms are "all higher growth and they all have low healthcare reform risk," said Martin Jarzebowski, sector head of healthcare for Federated Investors.

"Those two things in combination mean that those best-performing names are safe havens amid both economic and regulatory uncertainty," Jarzebowski said. "That’s the glue behind all of them."

Earnings for S&P 500 healthcare companies are expected to rise by 6.2% in 2019, according to IBES data from Refinitiv, more than twice the 2.7% earnings growth expected for the S&P 500 overall, despite the market's strong performance this year.

Two of the three top-performing S&P 500 healthcare stocks so far in 2019 are in the dental space. Shares of Dentsply Sirona Inc XRAY.O and Align Technology Inc ALGN.O have jumped 53% and 49%, respectively in 2019. Shares of biotechnology company Celgene CELG.O are up about 51% this year because it is being acquired by drugmaker Bristol-Myers Squibb BMY.N. Bristol, by comparison, is down 9% this year.

Dentsply Sirona, which makes an array of products found in the dentist's office, is a "turnaround story" after a rough 2018 for the shares, said William Blair analyst John Kreger. New products and a solid first-quarter report have helped the stock, he said.

Align Technology, which specializes in clear aligners that straighten teeth, saw its shares sell off late last year with tech and growth stocks as the market swooned. Along with those other stocks, shares of Align are rebounding as they also benefit from lessening concerns about competitive price pressures, Kreger said.

"No one is really talking about reforming dental and how dental is provided," Kreger said. "The idea is you can get the growth potential without the regulatory uncertainty or the political uncertainty."

Healthcare's overall sluggishness this year means the sector looks relatively cheap. It now trades at 14.8 times forward earnings estimates compared to 16.2 times for the S&P 500, according to Refinitiv data. The sector and the broader market began the year with similar valuations.

Healthcare, a topic that helped Democrats regain control of the House of Representatives in the 2018 elections, is likely to come into the spotlight when a crowded field of Democratic candidates meet on June 26 and 27 for the party's first presidential debates.

Former Vice President Joe Biden, who tallied the most support in a Reuters/Ipsos poll released earlier this month , is seen by investors as likely to back more moderate healthcare reform efforts than left-leaning candidates, such as U.S. Senator Bernie Sanders of Vermont.

Should Sanders, who advocates Medicare for All, or other candidates with similar views gain more prominence, the healthcare sector could face increased pressure.

"I think there’s more potential downside to the debates," McRoberts said.

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(Reporting by Lewis Krauskopf; Editing by Alden Bentley and Bill Berkrot)

((lewis.krauskopf@thomsonreuters.com; 646-223-6082; Reuters Messaging: lewis.krauskopf.thomsonreuters.com@reuters.net, Twitter: @LKrauskopf))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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