Healthcare companies have missed out on this year’s market rally, and they’re facing threats and challenges that can make a prospective investor feel ill.
But Omar Aguilar, the chief investment officer for equities and multi-asset strategies at Charles Schwab Investment Management, says the sector has a great deal to offer — and that Wall Street is failing to appreciate it.
“If you close your eyes, don’t even know these are health care companies, and you look at their balance sheets, you lookout the earnings growth, you look at the valuations, it’s a very attractive opportunity,” he said in an interview with Business Insider.
But investors haven’t been able to close their eyes and pretend they’re something else. They’re concerned about what big changes in health insurance, like the Medicare for All proposals backed by some Democrats, would do to that industry. The companies themselves are concerned as well.
Meanwhile, companies that make and distribute drugs face the prospect of new regulations that could lower prices and cut into their profits.
And so the stocks have trailed the market dramatically this year. While the S&P 500 has surged 17% and reached new highs, healthcare stocks in the index are up just 4%. No other sector has fared nearly as badly: the next-worst performer, utilities, has gained almost 10%.
Aguilar acknowledges those concerns, but says they’re not something investors should focus on right now. There are a wide variety of drug and health care proposals circulating in the political system, and it’s not clear if any of them can pass now, or if that can happen even if pro-reform Democrats win full control of the government in 2020.
“When that happens … it will affect other parts of the market,” he said. “I doubt it’s just going to be specific to health care. In the meantime, it’s an asset class that has been under appreciated for the entire year.”
While much of the sector appears to be in limbo, Aguilar adds that that’s not really new for health care. Health insurance stocks gyrated before the Affordable Care Act was passed in 2010. More recently, the stocks traded on the possibility the law might be repealed.
“They always have the challenge of the political environment,” he said.
But Aguilar’s optimism doesn’t extend to all health care stocks. The exception to his rule is biotech. Those stocks don’t measure up by some of his preferred criteria, and many investors see them as the most vulnerable to restrictions on drug prices.
“The rest of the health care sector seems to be attractive, especially in this part of the cycle where they provide growth,” he said. “That’s something people are probably missing.”