Health stocks to watch this earning season as sector poised for resurgence

Petr Smagin The S&P 500’s health care sector ( NYSEARCA: XLV ), which holds a 12.7% weightage on S&P 500, has seen a rise of 8.14% in the past three months, driven by strength in pharma, biotech, health care services and provides and equipment and supplies. The sector has risen 6.62% in the last 12 months, higher than the S&P 500 materials index but well below the strong run seen in the communications and industrials sectors.

Health care has continued to benefit from long term trends such as an aging demographic and rising expenditure on health in the U.S. SA subscribers see health care as the second biggest winner this year among S&P sectors, behind information technology. About 14% see it as the S&P 500's biggest gainer, a significant boost from 2023 when just 5% of readers said the same.

A Barclays U.S. Equity Strategy report from November also suggested health care ( XLV ) could deliver solid earnings growth in 2024, “but traditionally defensive sectors could remain out of favor in a ‘soft ish’ landing scenario. Goldman Sachs has a more cautious view and believes the sector will have 21% negative EPS growth for Q4 2023, weighed down in part by pricing competition from generic drugs.

Despite underperforming in 2023 amid the performance of the tech sector and near term headwinds ahead, the long term outlook remains solid and a recovery is likely according to SA contributor Ricardo Fernandez. According to Seeking Alpha's Quant Rating system, the health care sector has an average health score of 3.22.

The system awards grades based on quantitative measures, like valuation, earnings growth and recent stock performance. The highest possible score for any individual company is a 5. Of the 66 individual stocks in the S&P health care sector, 12 are rated as at least a Buy and seven are a Strong Buy by SA's Quant system.

Just two stocks are rated as a Sell. Gilead Sciences ( GILD ) holds the highest score of 4.92 after beating Wall Street forecasts on revenue throughout 2023 thanks to its HIV franchise. It also notably avoided the sharp selloffs seen in some of its fellow pandemic era favorites such as Pfizer ( PFE ) and Moderna ( MRNA ), each of which lost more than 40% in 2023.

Gilead ( GILD ) is a Strong Buy according to Seeking Alpha's Quant Rating System, as the A+, B, and B+ grades it has scored for profitability, momentum and earnings revisions outweighed the C rating for growth. Centene ( CNC ) is also a Strong Buy with a 4.9 score, with the healthcare insurer recently raising its guidance for 2024.

SA contributor Main Street Investor sees the stock as an " overlooked healthcare giant ", delivering resilient performance and steady growth. Centene has beaten EPS expectations in the last nine consecutive quarters, including by a definitive 30% in its last quarter ended September 2023. The stock has held a Strong Buy rating since November.

Elevance Health ( ELV ) ranks third with a 4.88 score, thanks to strong scores across all factors except a D for valuation. The company's medical membership structure and venture into other business segments like PBM and healthcare services are similar to market leader UnitedHealth Group ( UNH ), but SA contributor Joshua Hall noted the Elevance has grown its member base faster than UnitedHealth , especially on the higher margin commercial side.

Elevance's strategy has it poised to achieve its long term operating margin guidance and deliver low double digit returns. The company started 2024 on a strong note with the acquisition of Paragon Healthcare , which specializes in life saving and life giving infusible and injectable therapies. Bio Rad Laboratories ( BIO ) and Moderna ( MRNA ) are the sole stocks in the health care sector with a Sell rating, with scores of 1.60 and 1.43, respectively.

SA contributor Zach Bristow sees Bio Rad's large ownership in Sartorius as a hindrance due to the latter's poor performance. Bio Rad's business returns are not attractive nor economically valuable, leading the market to push its equity value further to the downside. Meanwhile, Moderna has been weighed down by poor COVID 19 vaccine sales.

Its oncology programs show promise, but there is still significant clinical development ahead according to contributor Volatility Surfer. The firm aims to achieve positive cash flow by 2026 through new product launches and cost cutting measures. S&P Global said EPS for the health care sector is expected to rise 8.32%, Goldman Sachs expects the EPS to negatively grow by 13%, and BofA Securities expects it to negatively grow by 11.5%.

Citi sees a resurgence ahead for the health care sector as a whole, upgrading it to market weight from underweight as earnings are expected to move higher, according to its U.S. Equity Strategy report on the sectors and industry groups. Big pharma is the swing factor and “valuations and profitability are tailwinds" according to its analysts.

Morgan Stanley is also bullish about the managed care and retail pharmacy space, mainly due to the biosimilar/GLP 1 opportunity, despite the looming 2024 elections and rising healthcare utilization rates. More on Health Care Select Sector SPDR XLV Likely Back To Outperforming XLV: Considering The Low Maintenance Option To Navigate The Healthcare Sector Ideal Pairs Trade Into 2024: Health Vs.

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