Health care stocks thrive amid debate

Sector is second-best performer in 2017

pricing practices” and Donald Trump made clear he planned to do away with the ACA.

Health care stocks are “playing a little catch-up,” says Brad Sorensen, managing director at Schwab Center for Financial Research.

But bouncing back from a bad year is only part of the story.

Eddie Yoon, manager of Fidelity Select Health Care fund, says by the end of 2016, the hard-hit sector was again cheap enough to attract buyers, with valuations hitting a low relative to the market not seen since the early 1990s.

Investors also determined that fears of drug price controls and a lack of clarity regarding the new health reform bill were overblown. Investors believe the Republican-led Congress will be more friendly to the industry than Clinton would have been.

“The market,” says Yoon, “is realizing the pricing environment won’t be as draconian as feared.”

At the end of February, his portfolio was filled with stocks he says have good growth prospects, such as biotech Amgen, up nearly 16% this year; device maker Boston Scientific, up about 13%; and technology solutions names such as Teladoc, up 41%.

Investors say a new health care bill won’t upend the industry.

“Whatever changes end up occurring, you are still going to have sufficient demand in place where these companies are going to prosper,” says Mark Oelschlager, manager of Live Oak Health Sciences fund.

Changes, Yoon adds, won’t undermine “key pillars of growth.”

Working in health care’s longterm favor, he argues, is its tremendous innovation, which creates a fresh pipeline of new drugs to treat ailments such as high cholesterol.

Another growth driver is demographics, as aging populations mean greater demand for medications, more visits to the hospital and a greater reliance on life-saving and life-enhancing surgeries, such as heart bypasses and knee replacements.

U.S. health providers also will tap into growth from emerging middle classes around the globe.

“Health care’s growth is more durable,” Yoon says.

The ability of health care companies to increase sales and earnings no matter what the economy is doing also makes them coveted, Oelschlager adds. Stocks in his fund that have bounced back this year include Stryker, a maker of implants used in joint replacement that’s up nearly 11%, and Becton Dickinson, which makes medical instruments and supplies such as syringes and is up more than 10%.

Sorensen recently upgraded the health care sector to “outperform,” which reflects a more upbeat outlook. A key reason is the aging of the world’s population, which he dubs an “underlying tailwind.”

“As we get older and fatter we need more health care,” he says. “People demand more drugs and more procedures.”