Healthcare sector trending up

Sentiment towards healthcare stocks has dramatically improved as it became clear that any reform was unlikely to impinge industry profitability as much as originally thought. Today, however, the sector surged as investors speculated the bill might be scrapped altogether (see more here).

Overhaul or not, healthcare firms are in solid position for 2010. Removing the uncertainty that has been a major overhang on valuations in the sector is an obvious positive going forward. The uncertainty has led to the industry’s cheapest valuations in decades; for example, Johnson & Johnson (JNJ) trades at 14 times earnings, while its 10-year average exceeds 20.

Additionally, the sector has never had more cash relative to their market capitalization then they have today. Healthy balance sheets provide financial flexibility for stock buybacks, dividend payments, and acquisitions.

Pharmaceuticals expect game-changing clinical trial data throughout 2010 and positive results could go a long way in shifting negative sentiments surrounding the industry’s drug pipeline. Even more, the number of drug approvals by the FDA are moving higher, which has historically led to increased pharmaceutical sales.

Healthcare companies are also doing a good job of meeting earnings estimates thanks to cost-cutting and revenue growth, partly due to the weak U.S. dollar and significant overseas sales. Meeting (or exceeding) earnings estimates should help lure investors back to a sector known for steady reliable profits.

Though the stocks rallied significantly in the second half of 2009, they remain attractive. The worst case scenarios for the majority of the sector are off the table. Now investors can focus on long-term fundamentals and trends such as an aging population, significant international exposure, and financial flexibility to grow and return value to shareholders.
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Peter J. Lazaroff, Investment Analyst