Health care stocks could suffer this year. Here’s why

Big health care companies will undoubtedly be political punching bags during the 2020 presidential campaign, as candidates all seem to have their own ideas on how overhaul the industry. And that could be a problem for investors in the stocks of major drugmakers, insurers and hospitals.

Progressive Democrats Bernie Sanders and Elizabeth Warren have been touting their own “Medicare for All” plans. Pete Buttigieg espouses a slightly less disruptive “Medicare for All Who Want It'” proposal. And Joe Biden is essentially calling for an Affordable Care Act 2.0, a revamped Obamacare.

Meanwhile, President Trump is targeting high prices for prescription drugs and wants hospitals and insurers to disclose the rates they negotiate with each other for various procedures and medical services. While he said “we will never let socialism destroy American healthcare” at his State of The Union address Tuesday, investors have reason to be concerned if he is re-elected.

Because of these concerns, several prominent health care stocks have lagged the broader market’s gains for the past year.

Pharmaceutical giant Pfizer was one of the few Dow components to fall in 2019. Rival Merck was down 3% Wednesday after saying that the company may spin off assets in order to streamline operations.

The stocks of both companies have been hit by concerns about high drug prices and worries that they are losing patent protection for many key medications.

Drugstore chain Walgreens was the worst performer in the Dow in 2019, plunging amid concerns about cheaper generic drugs and how lower reimbursement rates for medications from state and federal government health care plans would hurt earnings.

And many health care companies, particularly Johnson & Johnson, are facing potentially billions of dollars in liabilities tied to lawsuits related to the nation’s opioid addiction crisis.

The case for health care stocks to lead the market

Some experts believe investors have already priced these worries into beaten up stocks, and there could be some values.

“Health care should be a top sector for 2020. It has not done well over the past few years because of drug pricing rhetoric and Medicare for all,” said Raj Gupta, an analyst for William O’Neil & Co. He believes big companies will adapt to whatever the new regulatory landscape looks like.

Gupta said that managed care companies such as UnitedHealth, Cigna and Anthem could still do well even if there are new health care laws. So could Walgreens rival CVS, which owns insurer Aetna.

And it’s not clear that any single politician could disrupt the entire health care industry, said Matt Miskin, chief investment strategist at John Hancock Investment Management.

If re-elected, Trump might still face a divided Congress, which could lead to gridlock. Ditto if he’s defeated in November. And valuations are now reasonable, as well.

“Even if you price in a progressive Democrat winning and putting health care in the crosshairs, earnings growth for health care companies look strong despite some Medicare for All risk,” Miskin said.

So it might be a mistake to sell health care stocks amid the political noise and rhetoric, said John Cunnison, chief investment officer for Baker Boyer.

Big dividend yields that are better than bonds

Cunnison said he plans to hold on to health care stocks throughout this year’s election cycle. He added that health care stocks could also get a bump if the market choppiness continues and investors start looking for more defensive safe haven companies.

“Value usually beats growth in a volatile market,” Cunnison said. He also noted that many health care stocks pay big dividends, which will be attractive to conservative investors.

The average yield for companies in the Health Care Select Sector SPDR ETF is nearly 2.2%, compared to a yield of around 1.63% for the 10-year Treasury bond.

Finally, the coronavirus outbreak in China may also provide some opportunities for Gilead Sciences, AbbVie and other biotechs that are working on a vaccine.

While it’s unclear when — or even if — any drug makers can come up with a successful treatment for coronavirus, Gupta thinks that companies that make test kits and other diagnostic tools, such as Baxter and Masimo, could benefit from a short-term boost in demand.