The Health Care sector is comprised of many diverse companies, as can be seen from the list of subsectors provided below. Historically the Health Care sector has been comprised of a significant number of companies with above-average growth rates of earnings. Consequently, a majority of the companies comprising the Health Care sector could be thought of as growth stocks over dividend growth stocks.
One of the primary reasons for this was that the sector was benefiting from the tailwinds of the powerful demographic forces of an aging population. Additionally, there were many scientific advances that also provided above-average growth to many companies in this sector. As a result, health care stocks were once considered defensive because they were mostly unaffected by economic weakness.
Big pharma was a major beneficiary of these two growth factors for many years. However, big pharma names like Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK) were also classic above-average growing blue-chip dividend stocks. In days gone past, big pharma, and many other quality companies in the Health Care sector could be counted on to grow earnings, and dividends if they pay any, like clockwork.
However, since the recession of 2001, the characteristics and the attributes of big pharma changed dramatically. Instead of generating quintessential earnings growth patterns, their operating results became flatter (slower) and even cyclical. Consequently, it’s imperative that investor attitudes towards big pharma adjust to the changing operating environment of today. This will be elaborated on later.
The economic environment for the Health Care sector today has clearly changed and evolved. For starters, it has become more and more difficult for large multi-billion-dollar market cap multi-national drug companies to produce enough new blockbuster drugs to support their growth. Additionally, companies in the biotech segment have been developing more promising therapies that threaten blockbuster drugs from gaining traction. However, these are not the only headwinds now facing big pharma, and the entire Health Care sector for the matter. We now have the passage of the Health Care Reform Act that has brought significant uncertainty as to the ability of the entire sector’s capability for profitable future growth.
Nevertheless, the tailwinds of powerful demographics, mainly an aging population, cannot be ignored. Moreover, the jury is still out as to whether or not the Health Care Reform Act, aka Obamacare, will be a boon or a detriment to this sector. Consequently, valuations for many companies in this broad sector remain below historical norms, as well as intrinsic valuation, based on historical results. The real question that must be successfully answered is what is going to happen to future growth? The uncertainty behind this question is more likely than not the major factor keeping many of these companies at historically low valuations.
The Health Care Sector
This is the seventh in a series of articles designed to find value in today’s stock market environment. However, it is the sixth of 10 articles covering the 10 major general sectors. In my first article, I laid the foundation that represents the two primary underlying ideas supporting the need to publish such a treatise. First and foremost, that it is not a stock market; rather it is a market of stocks. Second, that regardless of the level of the general market, there will always be overvalued, undervalued and fairly valued individual stocks to be found.
My first article was titled “Searching For Value Sector By Sector,” my second article was titled “Finding Great Value In The Energy Sector.” My third article was titled “Finding Value In The Materials Sector Is A Material Thing.” My fourth article was titled “The Industrial Sector Offers A Lot Of Value, Dividend Growth And Income.” My fifth article was titled Beware The Valuations On The Best Consumer Discretionary Dividend Growth Stocks, and my sixth article was titled, Are Blue-Chip Consumer Staples Worth Today’s Premium Valuations?