Healthcare Spending

Health Care is by far the cheapest sector in the S&P 500, with the pharmaceutical stocks being the cheapest subgroup. This makes little sense to me as the economic environment is still uncertain and the aging baby boomers will require more medical care.

The reason most bears will cite for the underperformance is health care reform. However, health care reform is reform only in name. It is a giant spending bill. It will cost the government nearly one trillion dollars. An article in the New York Times this weekend said it will raise costs for small businesses. If everybody will be spending more money on health care, how will this be bad for health care companies?

5 comments:

Anonymous said...

Ah, the problem with your reasoning here is that it is reality-based, unlike the market. In the real world, it is possible for a defensive stock to also be a growth stock. Meanwhile, in the unreal world of our current mania, Gilead Sciences grows its top line at 31% and sells for fourteen times next year's earnings. Yes, it is growing twice as fast as Apple or Google, but it is defensive, right?

Tsachy Mishal said...

I noticed that GILD and AMGN have been getting cheaper vs pharma. I might diversify some of my pharma exposure into them. I want to wait until MRK/SGP closes because the pharma sector should get another bump from the closing.

Anonymous said...

Agreed. GENZ also looks cheap. It is priced as if its manufacturing problems are permanent, when they seem to have been more or less solved.

Tsachy Mishal said...

AMGN trades at 9.5 times net of cash, while GILD trades at 15 times and GENZ trades similarly. Are there prospects so much better than AMGN as to deserve a 50% premium multiple? I am only starting to do work on the group. I am just wondering why there is such a premium?

Tsachy Mishal said...

My bad. GENZ trades at 12.5 times. They also have cash on balance sheet.