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The average healthcare stock in the S&P 1500 Index has returned 8% including dividends this year, just below the broad index’s average total return of 9%, explains Richard Moroney, editor of Dow Theory Forecasts.
Political risks continue to weigh on shares of drug companies and health insurers. On average, pharmaceutical stocks are down 7% in 2019, as many Republican and Democratic candidates running for office pledge to lower drug prices and the White House seeks its own strategy on the matter.
For now, drugmakers keep pushing through price hikes. U.S. prescription drug prices climbed 10.5% in the first six months of 2019, versus a 15% increase for the same period last year. On July 1, drugmakers raised list prices on branded and generic drugs an average of 13%.
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Risks for health insurers center on proposals for universal Medicare, made by Democrats, and the abolition of the Affordable Care Act, made by Republicans. The “Medicare for all” proposal would create a single government program for everyone, replacing private and employer coverage.
Meanwhile, an effort by Republican lawmakers to strike down the law entirely continues to wind its way through the courts. Eventually, the case will probably reach the U.S. Supreme Court, which upheld ACA in 2012 and again in 2015.
Nevertheless, the S&P 1500 healthcare sector enjoys a remarkably consistent track record for producing gains. Just three times in the past 25 years did it suffer an annual decline: (drops of 2% in 1994, 14% in 2002, and 26% in 2008). That’s fewer than any of the other sectors in the index during this 25-year span.
While the frequency of the health-care sector outperforming the broad index seems modest — 13 of the past 25 years — its annualized return of 15.5% tops all other sectors. Technology ranks second at 13.3%, while the broad S&P 1500 managed 11.9%. We review three of our favorite health stocks below.
Centene (CNC) shares have slumped 21% this year, hurt by investor ambivalence over the insurer’s plan to acquire rival WellCare Health Plans (WCG) and questions about the fate of the Affordable Care Act.
Reflecting these concerns, Centene shares trade at just 11 times trailing earnings, near their lowest level since 2010 and well below an average of 20 for S&P 1500 Index health insurers.
Nevertheless, Centene’s biggest source of growth has come from the state and federal marketplaces, abandoned by many of the largest insurers. Centene says membership from the ACA marketplaces (13% of its members) grew 27% in the June quarter, while Medicaid Expansion (9%) increased 19%.