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Health Stocks Surge, Shrugging Off Uncertainty in Washington

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(Bloomberg) — There’s plenty of uncertainty about health policy in Washington, but on Wall Street, investors have a clear hunger for health stocks.

After Republican Donald Trump’s presidential-election victory, the health care sector trailed the pack as the wider market rallied. Heated campaign rhetoric from Trump and Democratic rival Hillary Clinton made investors wary that Washington would tamp down drug prices and take other steps to radically remake the health care marketplace.

(Related: Senate Republicans Unveil Health Care Plan)

Now, such fears are fading, and health stocks are making up for lost time. The Russell 2000 Healthcare Index has gained about 4.2% and the S&P Healthcare Index has gained 2.3% since Tuesday. The jump means the sector has erased the performance gap with the broader market, according to data compiled by Bloomberg.

Reports in recent days have suggested that an anticipated executive order from Trump on drug prices will be industry-friendly. And the Better Care Reconciliation Act, the Senate’s version of legislation to repeal and replace the Affordable Care Act, made public this week, doesn’t go as far as some feared in making changes to current law, analysts said. That’s given some investors the green light.

“I have enough clarity now to invest,” said Jeff Jonas, a portfolio manager at Gabelli & Co., managing about $600 million in health care assets. “What’s become clear is that we’re going to be sticking with something close to the status quo. The amount of change that the Senate or House bill was proposing is nothing compared to what we went through six or seven years ago when ACA was passed.”

Gabelli took advantage of a health selloff earlier this year, when Trump threatened to have the government negotiate drug costs, to buy shares of Shire P.L.C., Alexion Pharmaceuticals Inc. and Ligand Pharmaceuticals Inc., Jonas said. The firm’s Healthcare & Wellness fund, with $294 million in assets, had a total return of 6.2% in the first quarter, compared with 8.4% for the S&P 500 health index, according to the fund’s most recent quarterly report.

Great Rotation

Part of the jump is being driven by traders trying to stay ahead of a high-flying stock market — the S&P 500 index is up roughly 9% so far this year — by finding undervalued companies and sectors that may still have room to run, a strategy known as sector rotation.

The recent health rally “smells more like a risk-on trade as the sector has been technically beaten down,” said Benjamin Dunn, president of Alpha Theory L.L.C., which works with hedge funds overseeing about $6 billion. “It’s an obvious place to put some capital to work versus places like tech that have recently run.” Dunn said that so much money had been poured into tech stocks during the market’s runup that biotechnology and health care are natural areas to chase.

Among the biggest beneficiaries of investors’ renewed interest in health care have been exchange-traded funds. Over the past three days, investors piled more than $700 million into the Nasdaq Biotechnology ETF, known as the IBB, the most since the aftermath of November’s election. Outstanding shares for the IBB have jumped about 8% in the past three days, the strongest three-day span since November.

Despite the strength of recent days, the Nasdaq Biotechnology Index is still off 20% from its July 2015 peak.

The ambiguity surrounding congressional efforts to alter the Affordable Care Act served as a sort of “wet blanket” that has been removed and allowed the sector to take off, said Tony Scherrer, director of research and co-portfolio manager at Smead Capital Management, which manages about $2 billion. “The first move this week was related to what may or may not happen with price controls and yesterday’s health care announcement only fueled it from there.”

Leerink analyst Geoffrey Porges wrote in a note to clients that that he expects the biotech sector to climb another 15% on second-quarter earnings after its recent gains.

Open for Business

While Trump is yet to issue his drug-prices order and the Senate’s health legislation faces a tough road to passage, given opposition from key Republicans, some investors also point to signs that the Food and Drug Administration will give new drugs a smoother, faster path to market. The FDA has approved 23 drugs so far this year — more than in all of 2016.

“What people forget is the FDA is open for business, and the industry is productive in its research and development efforts,” said Marshall Gordon, an investor with Clearbridge Investments. He said that managed care, medical technology and biotech all represent growth areas within health care.

Gordon said the market has realized lawmakers aren’t likely to change the way drugs are priced in the U.S.

“Health care specialists have been onto this for a while, but generalists are finally getting to this — that they aren’t going to hurt drug pricing,” he said.

— Check out Four GOP Senators Spurn Health Plan Aimed at Unifying Party on ThinkAdvisor.


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