Becoming an Investor

Healthcare Stocks Are Bargains Now

Healthcare shares are about as cheap as they have been in 40 years, yet expectations for earnings growth are strong.

Things have to be smoking hot in the stock market for a fund with a 23% one-year return to be considered an underperformer. But that's where we find Fidelity Select Health Care (FSPHX), which in absolute returns had a bonny year but lagged the 38% gain in the S&P 500 Index.

Its peers (health-focused stock funds) also did better, albeit only a bit, with an average 26% gain. Select Health Care is a member of the Kiplinger 25, our list of favorite mutual funds.

Investors have been focused on stocks that will benefit from the economic recovery, and that typically doesn't include healthcare shares.

Plus, large-company pharmaceutical firms, which make up 35% of the sector, have not performed well because of uncertainty about expiring patents, says Select Health Care manager Eddie Yoon. "The healthcare sector doesn't sit squarely in the broader narrative of what's going on with the reopening of the economy," he says.

Healthcare stocks rarely dominate in any given year. Outside of the occasional headline-making breakthrough, they tend to chug along, increasing earnings year over year but not winning much attention. A lack of enthusiasm for the sector is creating opportunity.

In the Bargain Bin

Healthcare shares are about as cheap as they have been in 40 years. Yet long-term demand and expectations for earnings growth are strong. Plus, the sector is going through an "enormous amount of innovation," says Yoon.

Yoon has been manager since 2008. He and a dozen analysts with subindustry expertise pick the stocks.

Established firms with stable earnings carry the biggest weights; smaller firms with bigger growth opportunities but more unknowns get smaller weights.

Insurer UnitedHealth Group (UNH), diagnostics and research company Danaher (DHR) and biotech firm Regeneron Pharmaceuticals (REGN) are big fund holdings.

Small firms include two that Yoon held before they went public: Stock in Alignment Healthcare (ALHC), a Medicare Advantage insurer, is up 35% since it debuted in March; Oak Street Health (OSH), which operates primary care Medicare clinics, has gained 51% since going public last August.

Over the past decade, Select Health Care easily trounced its peer group and the S&P 500, with an annualized 17.9% gain.

Most Popular

What Are the Income Tax Brackets for 2022 vs. 2021?
tax brackets

What Are the Income Tax Brackets for 2022 vs. 2021?

Depending on your taxable income, you can end up in one of seven different federal income tax brackets – each with its own marginal tax rate.
September 20, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
19 Best Stocks to Buy Now for High Upside Potential
stocks

19 Best Stocks to Buy Now for High Upside Potential

Finding the best stocks to buy when the market is selling off can be daunting, but the pros believe these 19 top-rated names are poised for big return…
September 23, 2022

Recommended

Stock Market Today (9/23/22): Dow Plummets 486 Points, Nears Bear Market
Stock Market Today

Stock Market Today (9/23/22): Dow Plummets 486 Points, Nears Bear Market

The selling wasn't confined to the equities market, with crude oil, gold and Bitcoin all suffering steep losses.
September 23, 2022
Kiplinger's Weekly Earnings Calendar
stocks

Kiplinger's Weekly Earnings Calendar

Check out our earnings calendar for the upcoming week.
September 23, 2022
19 Best Stocks to Buy Now for High Upside Potential
stocks

19 Best Stocks to Buy Now for High Upside Potential

Finding the best stocks to buy when the market is selling off can be daunting, but the pros believe these 19 top-rated names are poised for big return…
September 23, 2022
Stock Market Today (9/22/22): Stocks Fall as Global Banks Follow in Fed's Footsteps
Stock Market Today

Stock Market Today (9/22/22): Stocks Fall as Global Banks Follow in Fed's Footsteps

Treasury yields on the two-year and 10-year notes spiked to their highest levels in over a decade as central banks around the world rush to tame infla…
September 22, 2022