Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 19 January 2017 at 15:15 GMT

Healthcare equities aren't as healthy as many think – #SaxoStrats

Head of Equity Strategy / Saxo Bank
  • Value and contrarian investors begin to return to US healthcare sector
  • Comparing energy and healthcare is a flawed proposition
  • In terms of valuation, healthcare could easily go lower
healthcare flatlining
 Healthcare stocks need some stronger medicine before they're worth it. Photo: iStock

By Peter Garnry

Value and contrarian (mean reversion) investors are beginning to flock back to the US healthcare sector following a dismal 2016. The argument goes something like: “energy was the worst performer in 2015 and see what happened in 2016 – it will happen to health care as well”. 

My main point is that these are not comparable because energy is driven by oil which is a global market controlled by a few players whereas the healthcare sector in the US is a heavy regulated market. Here, direct policy changes have implications and income growth does long-term dictate growth in healthcare.

Our view is that in terms of valuation (see chart below) we could easily go lower as (a) policy uncertainty is becoming fully priced in, (b) margins are lower (and as a result ROIC) due to pricing pressure and (c) lower revenue growth as US households cannot absorb the last 10 years of insane price gains on drugs and health insurance. 

Finally, momentum remains very weak, indicating a higher likelihood of more underperformance during the next three months. President-elect Trump’s remarks on healthcare suggest reforms are coming and they are likely not going to be an advantage to the companies.

US healthcare industry group valuation. 12-month forward EV/EBIDTA ratio (z-score)
healthcare valuation
 Source: Saxo Bank

 – Edited by Clare MacCarthy


Peter Garnry is head of equity strategy at Saxo Bank


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