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Healthcare stocks shine in lousy economy

Posted by: Brian O'Connell on June, 27, 2011 Source: Kauffman Foundation

Want to make a buck in the stock market – even in a market that looks as fragile as a New York Mets winning streak?

Then look to healthcare stocks.

The stock market has experienced declines in six of the past seven weeks. But healthcare stocks seem to be more resilient than other sectors.

The Standard & Poor’s 500 tells the story.

S & P 500 Chart

With healthcare stocks outperforming the S&P 500 Index to the tune of 9.99 percent versus 1.8 percent on a year-to-date basis and 4.76 percent to -3.89 percent on a quarterly basis, healthcare investors – and industry business owners – may want to know: Is the outperformance an aberration or is it expected? Is it a scenario with historic cornerstones for investors to build on?

The Berwyn, Pennsylvania-based investment advisory firm Turner Investments has an opinion on that. The firm is out with fresh analysis that healthcare stocks generally and historically generate higher returns than other sectors in periods of great economic strife. In fact, the current economic downturn is no exception, Turner says.

  • The firm expects healthcare stocks to produce good relative returns in the next few months.
  • Healthcare has been the best performer of the nine sectors in the broad-based Russell 3000 Index for the year to date through May 31.
  •  In 2010, the healthcare sector lagged badly, gaining just 3.89 percent, compared with a 25.84 percent return for the leading sector, consumer discretionary, and 16.93 percent for the overall Russell 3000 Index.

The firm’s research article, “Why Healthcare Stocks May Shine In the Near Term,” makes the interesting point that healthcare is an outperformer against other indices precisely because the economy is faring so poorly.

In our estimation, healthcare’s out performance this year is due in no small part to the slowdown in the U.S. economy. The stock market has been rattled by a jangling assortment of negative economic developments, such as slower manufacturing growth, higher commodity and energy prices, rising inflation, lackluster consumer spending, the ripple effects from China’s tightening of credit, and the threat that Europe’s government-debt problems may morph into the second global financial crisis in three years. Investors are questioning whether the U.S. economic slowdown is temporary or the start of a recession. (We think it is only temporary, that the economy should reaccelerate as the year progresses.)

That’s where healthcare stocks can shore up a poorly performing portfolio. Turner analysts say that healthcare stocks are the ideal “defensive” sector – a sector that benefits from stable demand.

Turner says that “people typically spend on healthcare to maintain or restore their health when they need to, no matter how the economy is behaving...So while the U.S. economy remains stuck in a soft patch, in what we characterize as a mid-cycle slowdown, we think healthcare stocks are likely to continue to perform well.”

Three additional reasons why Turner thinks healthcare stocks win out in tough times:

  • Healthcare stocks do well at this time of the year, from May to October, when stock-market returns tend to be anemic.
  • Many institutional portfolio managers seem to be beefing up their weightings in the healthcare sector.
  • The sector’s fundamentals, such as earnings growth and return on assets, are robust.

If you’re looking for a safe haven on a stormy night, healthcare stocks may offer some shelter.

That’s a good sign for investors – and for the healthcare industry.

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