As I wrote yesterday, healthcare stocks have been the best performing sector of the S&P 500 for two weeks running.
Will we make it three in a row in this holiday-shortened week?
We’ll know soon enough. I do know my Max Profit Alert subscribers are making bank right now on a bullish options play on the sector!
At any rate, two consecutive weeks was enough to get my attention, particularly given that healthcare stocks have taken the place of utilities as the defensive safe-haven sector. For the first time in years, investors are really starting to look at the circular AI economy with a healthy dose of skepticism.
And this is the beauty of healthcare. It’s outside of the circle.
If OpenAI buys fewer chips from Nvidia… or less cloud computing from Amazon or Microsoft… it’s not going to affect your doctor’s decision to write a prescription or recommend a procedure.
Simply not being part of the AI ecosystem is enough to make healthcare worth a deeper look.
So, that’s what we’re going to do!
Sector X-Ray of the Healthcare Sector
Healthcare has been the standout performer of the past two weeks, but even a quick superficial look would tell you that the sector remains a stock picker’s market. At 27, nearly half of the 59 stocks in the sector rate as “Bearish” on my Green Zone Power Ratings system, and another 13 rate as “neutral.”
Only 19 rate as “Bullish,” meaning they score a 60 or higher out of 100.
Still, 19 still gives us quite a bit to work with.
Remember, the single biggest selling point for the health sector is that it is largely outside of the AI circle. But this requires a little explanation.
As is the case with every major technological innovation, AI will reshape every industry, including healthcare, as doctors and researchers work the new technology into their processes. Your doctor will provide you better service in the future with help from AI diagnostic tools, and the new drug discovery process will move a lot faster. I have zero doubt on this.
The difference is that the profit model of the industry is not dependent on continued AI capital spending. If OpenAI runs out of cash and has to pull back on its ambitions, it will create a chain reaction that takes down large swaths of the technology, communications, energy and utilities sectors, among others.
But it’s not going to take down the health care sector.
Quality, Low-Volatility Growth
Apart from the sector’s insulation from an AI bust, there’s quite a bit more to like.
To start, it’s one of the highest-quality market sectors, with fully 54 out of 59 stocks rated as “Bullish” on their quality factor. The beauty of patent protection is that it locks in very competitive profit margins, which boosts the quality factor rating.
Due in large part to the stability of their profits – as I’ve repeatedly pointed out, health care is largely immune to the ups and downs of the economic cycle – health care stocks also tend to rate well on their volatility factor. 28 out of 59 rate as “Bullish” on volatility.
And while growth-obsessed investors have been obsessed with the tech sector over the past several years, the healthcare sector is no slouch on growth. 28 out of 59 rate as “Bullish” on their growth factor as well.
If there is one area where the sector is somewhat weak, it would be value. Only 14 out of 59 rate as “Bullish” on value. High-quality companies are usually priced accordingly, and that’s what we see in the healthcare sector today.
The Best on Sale
It’s early, but I believe we are likely in the early stages of a market rotation that favors value stocks. I think it is highly likely that we’re entering a more “sober” market regime, one based more on fundamentals and less on hype.
So, let’s dig even deeper into the sector.
My criteria here is simple. I want “Bullish” rated stocks that also specifically rate as bullish on their quality, growth and value.
To paraphrase the great Warren Buffett, I want a list of wonderful businesses selling for reasonable prices.
That screen left me with four names.
One company should look familiar. I mentioned Merck (MRK) yesterday, as it was one of the best-performing stocks last week. Merck rates a stellar 94 on its quality factor, a “Strong Bullish” 86 on growth and a “Bullish” 62 on value.
That’s the definition of a high-quality growth stock trading at a reasonable price.
To good profits,
Adam O’Dell
Editor, What My System Says Today
