TLDR
- Healthcare stocks are gaining momentum as investors rotate out of AI and tech into defensive sectors
- The Health Care Select Sector SPDR Fund closed up 3% Thursday, breaking above short-term resistance
- UnitedHealth and Eli Lilly lead S&P Health Care index Quant Rankings with scores of 3.47 and 3.44
- AI is being used in healthcare to screen drug candidates, with up to 50x more early-stage molecules now being evaluated
- Stocks like Intuitive Surgical, Natera, and Edwards Lifesciences are highlighted as individual picks with strong growth outlooks
Healthcare stocks are drawing fresh attention from investors after a period of underperformance. A combination of defensive rotation and growing AI adoption in the sector is putting health care names back on the radar.
The Health Care Select Sector SPDR Fund closed up 3% on Thursday. It also broke above a short-term resistance level, which analysts say points to improving momentum.
Increased trading volume in managed care stocks suggests institutional money is moving into the sector. Health care has lagged the broader market for years, making the shift worth watching.
The S&P 500’s healthcare component is down 4% year to date. Full-year earnings growth is forecast at just 4%, the lowest of any sector.
Government pressure on drug pricing, reduced Affordable Care Act enrollment, and a large one-time charge at Merck have all weighed on the sector. But underneath those headline numbers, some corners of healthcare are growing faster.
AI Is Changing How Drug Companies Work
Healthcare companies are using artificial intelligence to screen drug molecules faster and cheaper. Portfolio manager Shivani Vohra at Parnassus Investments says computer models are now doing work that previously required lab technicians.
“Anywhere from five to 50 times the number of early-stage candidates are being looked at,” Vohra said. That means companies can potentially advance better drug candidates more quickly.
This is one reason some investors are looking past the sector’s short-term headwinds.
Individual Stocks Drawing Attention
Eli Lilly leads the pack. Its GLP-1 drugs for obesity and diabetes are generating an estimated $22 billion in free cash this year, expected to rise to $47 billion by 2030. Shares trade at 31 times earnings.
Intuitive Surgical makes the da Vinci robotic surgery platform, now standard equipment in many hospitals. The company is releasing its first new platform in a decade, with upgrades in computing and imaging. The stock is down 25% over the past year and trades at 40 times earnings.
Natera offers blood tests for pregnant women and cancer patients. Revenue is expected to double to over $5 billion by the end of the decade, though the company is not yet profitable.
Edwards Lifesciences is moving beyond heart valve replacement into a newer and faster-growing category of valve therapies. Shares are at 29 times earnings.
Medline, which went public in December at $29 a share, recently traded under $35. It operates as a private-label supplier of medical products and trades at 23 times earnings.
Where the Rankings Stand
UnitedHealth and Eli Lilly currently hold the top two spots in the S&P Health Care index by Quant Rating, at 3.47 and 3.44 respectively. Both stocks posted gains in recent trading.
Johnson & Johnson, Thermo Fisher Scientific, and Intuitive Surgical follow in the rankings. None of the top holdings currently carry a bullish Quant Rating above 3.5, with most sitting in hold territory.
Abbott Laboratories holds the weakest score on the list at 2.71, approaching bearish territory.
AbbVie, Gilead Sciences, and Abbott round out the lower end of the rankings.
The overall picture is one of cautious stability, with select names standing out as the sector begins to find its footing again.
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