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Healthcare Sector - Income, Value, or Growth Play?

While many Healthcare stocks trade like value, growth, and income stocks, the answer is not as simple as it may sound. Some investors believe Healthcare stocks are growth companies because of the long-term aging demographics trend and the growing global population. Other investors believe Healthcare stocks trade more as value or income plays as government and policy issues (i.e., healthcare reform and government regulations) tend to slow down the sector and lower the growth potentials. While many more investors believe Healthcare names depend on their market capitalization, valuation, P/E, P/B, growth rate, among other valuation metrics. The general rule boils down to the following criteria:

1. Some Healthcare stocks are growth names, and some are value names. Typically, the Healthcare stocks that are value plays tend to pay healthy dividends (i.e., income). The growth-related Healthcare names tend to generate little or no dividends.

2. Growth Healthcare names often can dramatically influence the market in which they participate by innovation. These companies reinvest their cash in research and development, technology, and infrastructure. Biotech and Medical Technology stocks are classic growth companies.

3. Value Healthcare stocks are often matured and established companies with stable revenues and profits. They tend to be more economically sensitive and tend to depend on the business cycle. Their profits depend heavily on their distribution network, business efficiency, merchandising capacity, name recognition, and market share of current and future markets. Large Pharmaceuticals, Healthcare Insurers, Hospitals, and Healthcare suppliers and service providers are classic values companies.

4. There are also many hybrids within the Healthcare sector as they are a mixture of growth and value. These companies are often conglomerates with multiple businesses spanning both sides of the growth and value industries. Large integrated Drug/Device companies (i.e., JNJ, NVS, MDT, etc.) are classic hybrids where they do not fit the textbook definition of either growth or value.

Does it matter if a Healthcare company falls into the category of growth, value, or income? A trader or an investor should be interested in trading or investing in sectors or stocks that are trending higher (dominant or prevailing uptrends), offer favorable risk/reward potentials, and be in the right phase of the stock market/economic cycle.

The Relative Rotation Graph (RRG) study for the 8-weeks ending on August 9, 2021, shows caution within the S&P 500 as only 3 S&P sectors have rising tails, and 8 S&P sectors are in declining tails. The S&P Healthcare sector (XLV) stands out this past week as it has moved from the Improving Quadrant to the Leading Quadrant, hinting at emerging leadership. Technology (XLK) and Consumer Discretionary (XLY) also show rising tails, suggesting technical strengths.

Based on the RRG study, Healthcare technical leaderships are concentrated in Medical Supplies, Medical Equipment sectors, and Pharmaceuticals. In the Leading Quadrant, the following leadership Healthcare names with rising tails – RMD, WST, DXCM, LLY, ISRG, DHR, MTD, PFE, ALGN, and STE. Within the Improving Quadrant, the Healthcare names with rising tails are HOLX, CTLT, and TMO, signaling improving technical strengths.

Based on the SCTR study, leaderships are in 3 dominant Healthcare sectors. The top 30 ranked Healthcare names by SCTR show the following: Medical Equipment (6 names), Biotech (5 names), and Pharmaceutical (4 names).

In summary, the technical studies above confirm investors are favoring a mixture of Growth and Value Healthcare names. Within growth are the leadership Medical Equipment and Medical Supplies names and within the value are the leadership Pharmaceuticals.

Attached are the RRG charts and SCTR rankings of the large-cap Healthcare names.

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

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