Health care is the best pick for 2016, despite Thursday's drop: Strategist
Health care suffered a bad day on Thursday, but the sector remains next year’s best buy, according to one strategist.
Shares of UnitedHealth Group (UNH) tumbled nearly 6% on Thursday after the company cut its earnings forecast. The company sited the Affordable Care Act as hurting its bottom line, and said it was considering exiting the exchange markets that are the cornerstone of “Obamacare.”
Other health insurers followed suit and the ETF tracking the health care sector (trading under the symbol XLV) fell nearly 2% on Thursday.
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But UnitedHealth Group remains up 9% year-to-date while the XLV has gained nearly 4% so far this year. UnitedHealth Group is one of the XLV's largest holdings. Health care is the year's third-best performing sector in the overall S&P 500 (^GSPC), which itself is up just 1%.
According to Erin Gibbs, chief equity investment officer at S&P Investment Advisory Services, health care has some of the best top and bottom lines of all the sectors.
“It has the highest earnings growth for 2015 and one of the highest also for next year, as well,” said Gibbs, who is responsible for over $16 billion in assets under advisory. “Consistent, stable, high growth.”
Gibbs expects health care to show 14.4% earnings growth in 2015, the best increase of any sector this year. For 2016, she forecasts 9% growth for the sector. On the other hand, the S&P 500 is estimated to show 0.5% decline in earnings this year, due mostly to a 60% fall in the energy sector’s bottom line. Next year, Gibbs sees the index’s earnings to increase 8.4%.
Part of why she is bullish on health care is because of its top line growth. Gibbs predicts a 2% increase in the sector’s revenues for 2016, the best of any sector. For the overall S&P 500, she sees a 1% rise in sales.
“We view healthcare as one of these long-term secular trends of people spending more money,” she said, adding that Baby Boomers and younger generations will be spending more on their health.
Gibbs also finds the sector’s price to be attractive. “It also trades at very reasonable valuations,” she said. “You're not getting these really overpriced stocks, even when you're talking about such high earnings growth compared to the broader market.”
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