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Health care will be the most difficult sector from which to pick stock winners in 2014.
After a long period of underperformance (see 20-year chart), health-care stocks have sprung to life and have been soaring since the beginning of 2010.
That may seem strange because, for the most part, those companies’ fundamentals were solid pre-2010. But investors seemed to get serious about the sector only as the Affordable Care Act (so-called “Obamacare”) was passed into law.
The new law is viewed by many as damaging for companies that provide medical care and insurance because of the stipulation that everyone must carry some sort of individual policy or face penalties. And now the troubles with implementing the law’s major tenets have many investors scratching their heads.
However, stock prices are still rising, even in this period of confusion about who will pay, how much they’ll pay and which companies will be most affected by pressures on pricing and volume. And that’s exactly why I think it’s harder than usual to get comfortable with some parts of the sector — those that have done the best in some cases, like insurers.
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| Health care will be the most difficult sector from which to pick stock winners in 2014. |
So I plan to get overweight in health care versus the weighting in the S&P 500 to begin the year and then pull back exposure by the end of the year.
The leading stocks in the sector are now overvalued compared with their fundamentals. Remember that, as far as the companies go, their largest customer is the government, and when that happens, their pricing power evaporates over time. See how stocks soar when Medicare cuts reimbursement rates by less than had been feared. That situation is not a plus in my book, so I think we need to tread lightly in health care. Stick to former underperformers for new money and begin to reduce exposure to the insurers and big drug makers as we move through 2014.
And that’s why, today, I’m looking for stocks in the underperforming devices and hospital-management industries. Device manufacturers’ ratings have begun to improve at the same time that their stock prices stagnate. And I believe that is fertile ground for locating tomorrow’s winners.
Best wishes,
Don
