NEW YORK (Reuters) – Investors are looking for deals among healthcare shares, even as the prospect of a Democratic “blue sweep” in the coming month’s election threatens to have more volatility in a sector already trading near a historic rival to the broader market. The victory of former Vice President Joe Biden over President Donald Trump on November 3 and a possible Democratic takeover of the Senate could pave the way for reforms to drug price and health care coverage, which are generally seen as potential downsides for companies in the sector. Some investors are wagering that these factors are already priced in healthcare stocks or may not be as harmful as they expected, while companies may benefit from relatively stable earnings expectations and their medical innovations.
The good prospects for Biden’s election have weighed on healthcare stocks for most of 2020, according to investors, with the S&P 500 (SPXHC) healthcare sector up just 7% since the end of April, versus a 17% gain for the S&P 500 (SPX) overall. A Reuters/Ipsos poll on Sunday showed Biden made his most efficient advance in a month after Trump contracted COVID-19. The healthcare sector is now trading at a 26% discount to the S&P 500 on a price-to-earnings basis, according to Refinitiv Datastream. The sector’s 15.8 price-to-earnings ratio is well below the S&P 500’s rate of 21.3, which rose last month to its highest value since 2000, the gap between the sector’s P/E ratio and the S&P ratio reached its widest in at least 25 years last month, although it narrowed in recent weeks.
“When Biden started to do better in the polls, I saw that health care performance looked lower as the rest of the market recovered” said Ashten Evans, health care analyst with Edward Jones. While Biden may change insurance coverage by offering a government plan a “public option” he is also expected to seek to strengthen the Affordable Care Act — the signature health care law enacted when he was vice president — under which companies used to operate. Any significant drug pricing legislation may need to wait until the epidemic is further contained, as the government relies on the pharmaceutical industry to develop treatments and vaccines against Corona. Trump has also pledged to lower drug prices, making the issue less partisan. “We believe there remains a reasonably good possibility that the next Congress will introduce moderate changes in health policy that will create long-term clarity for the sector and investors” Eric Botker, an analyst at UBS Global Wealth Management, said in a note last month. Healthcare stocks have been subject to volatility around the election. Before the 2016 vote, which put Trump against former Secretary of State Hillary Clinton, who campaigned against rising prescription drug prices, the healthcare sector fell 6.6% in October compared to a 1.9% drop for the S&P 500 (SPX).
So far in October of this year, the sector is up by 1.2% versus a 1.7% rise for the S&P 500. The promise of a fiscal stimulus package has lifted groups like financial and industrial institutions that tend to be more sensitive to a broad economic recovery. Edward Jones Evans sees many opportunities in shares of pharmaceutical company Merck & Co (N:MRK) and medical device company Medtronic Inc (N:MDT).
Merck shares are down 12% so far in 2020, while Medtronic shares are down about 7%. Melissa Chadwick Dunn, portfolio manager at RS Investments, has long-term holdings in areas such as diabetes technology and biotechnology, where she sees strong potential in the future of healthcare. “The best antidote to all this uncertainty is a healthy dose of innovation” she said.