The stock market is having a banner year, despite the trade war with China and worries about a looming economic slowdown. But health care stocks aren’t taking part in the rally.
Three of the worst stocks in the Dow this year are drug store giant Walgreens, Big Pharma king Pfizer and top insurer UnitedHealth.
Continued worries about the possible unwinding of the Affordable Care Act — aka Obamacare — and renewed calls from the Trump administration and leading Democrats to push prescription drug prices lower are clouding the earnings outlook for many health care companies.
If Senator Elizabeth Warren continues to gain ground in the polls for the 2020 Democratic presidential nomination, that could add pressure to the group. Warren supports the Medicare For All single-payer plan backed by her rival, Senator Bernie Sanders.
Litigation worries are also a major concern. Look no further than Johnson & Johnson, another Dow component.
Shares of J&J fell 2% Wednesday and were down slightly for the year after a jury in Pennsylvania ruled J&J must pay $8 billion in punitive damages following a man’s claim that the company didn’t warn young men that they could grow breasts after using the antipsychotic drug Risperdal.
J&J was not immediately available for comment about whether it planned to appeal the judgment. However, the company did say in a statement that “this award is grossly disproportionate” with the original $680,000 compensatory award paid in the case, and that J&J was confident the $8 billion award — which it called “unfounded” — would be overturned.
The company is also dealing with a series of other legal problems, including allegations of asbestos in baby powder and the company’s role in the opioid addiction crisis. A number of other pharmaceutical companies are also facing legal battles.
The problems for drug companies, insurers and pharmacy chains (CVS is also a market loser this year) are a big reason why the entire sector has been a laggard this year.
The Health Care Select Sector SPDR ETF is up just 2% in 2019. Only one of the 11 S&P sectors has fared worse this year, the Energy Select Sector SPDR ETF, which is down 1.5%.
Weak growth and dividend yields that aren’t high enough
Earnings aren’t expected to rise all that dramatically for major health care companies, which is a problem when investors have better growth opportunities in sectors like tech and retail. Profits for Pfizer and Walgreens are expected to be flat in 2020.
What’s more, health care stocks may not catch on as a defensive play, either. Conservative investors have more attractive options among sectors that pay bigger dividends.
Utilities and real estate stocks are market winners this year in part because of their yields, which are higher than the under 1.6% for 10-year US Treasury bonds.
The Utilities Select Sector SPDR and Real Estate Select SPDR each have an average dividend yield of 2.9% while the Health Care ETF has a yield of about 1.7%.
In other words, health care stocks don’t offer enough safety and stability for defensively oriented investors if the economy goes south. And their profits aren’t rising at a fast enough clip to lure growth investors from more dynamic sectors if the market rally continues.
So health care stocks seem trapped in a no man’s land.