Politics pose a significant risk to U.S. health-care stocks. Investors should look past it.
Sen. Bernie Sanders has gained ground in the Democratic presidential race and is now tied with former Vice President Joe Biden among the party’s primary voters nationally, according to a recent Wall Street Journal/NBC News poll. Sen. Elizabeth Warren is in third place.
Sen. Sanders has proposed a dramatic overhaul of the U.S. health-care system known as Medicare for All. He could possibly gather more steam with a strong showing in Monday’s Iowa caucus.
Recent history suggests that could be a problem for Wall Street. Indeed, his gathering strength, coupled with general market weakness, pushed a broad index of health-care stocks 2% lower on Friday.
Some muscle memory is likely at work here. Biotechnology stocks plunged ahead of the 2016 election, once politicians began to publicly scrutinize high drug prices.
And health-care spending is a big target: It amounts to roughly 18% of gross domestic product, while health-care companies represent about 14% of the S&P 500.
Health policy under current law is highly favorable for companies; the Affordable Care Act expanded access to care without instituting meaningful cost controls. So investors aren’t likely to welcome major policy changes and can’t ignore the possibility of them.
However, a closer look suggests any politics-fueled selloff will present a buying opportunity.
The reason? Current polling likely overstates the true probability that Medicare for All becomes law soon.
And investors shouldn’t overreact to the Iowa Caucus results. The more important date comes a month from now: 14 states, including California and Texas, will hold a Democratic primary on March 3.
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Even in a scenario where a Medicare for All advocate wins the nomination, and even the presidency, overhauling health policy isn’t realistic without Congress on board. Building consensus among lawmakers and other stakeholders won’t happen overnight.
Insurers, drug manufacturers and other companies likely to be affected by any overhaul employ a host of lawyers and lobbyists and can be expected to fight new laws in court.
Of course, even the prospect of change can affect stock prices as investors build in even the outside chance of an overhaul. But investors, too, shouldn’t forget the sector’s current fundamentals are strong.
Nearly halfway through fourth-quarter earnings season, sales at S&P 500 health-care companies are projected to increase nearly 11% from a year ago, according to FactSet. That tops every other sector. Health-care earnings per share are forecast to grow by more than 6%, while the overall index is expected to report flat profits.
That growth comes at a reasonable valuation: The sector trades at less than 16 times forward earnings, while the market goes for about 18 times
If health stocks take a turn for the worse after the Iowa caucus, better to bet on a recovery.
Write to Charley Grant at charles.grant@wsj.com
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Health-Care Stocks Won’t Feel the Bern for Long - Wall Street Journal
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