Bank of America says healthcare stocks are usually strong performers in economic downturns. Their solid earnings and low valuations should help healthcare stocks going forward. The firm named 16 favorite stocks in the sector, including 3 that it thinks could double in price. Healthcare stocks aren’t having a great year, but Bank of America says it sees signs that the tide is going to turn.
The positives for the sector are pretty clear at this point, according to the firm: healthcare usually does well during recessions, and Bank of America says the economy is taking a turn for the worse.
Head of US Equity and Quantitative Strategy Savita Subramanian wrote in a recent note to clients that healthcare outperforms about 70% of the time during a downturn, beating the S&P 500 by 4.6% on average during those periods.
Strategists Jill Carey Hall and Nicolas Woods added in a separate note that downturns are the best economic phases for small-cap healthcare, and that large-cap healthcare typically does even better.
Subramanian said there are five major points in favor of the sector today, starting with its historic performance during downturns. She also wrote that the sector is stable and defensive, and it’s putting up strong earnings growth.
“Both earnings volatility and frequency of earnings declines have been well below the S&P 500,” she wrote. “Health Care has generated the strongest earnings growth of sectors historically, even topping Tech in recent quarters, with Tech earnings under pressure.”
She also explained that for the last five years, healthcare companies have been beating Wall Street earnings projections at a better clip than the S&P 500 overall, and they are seeing earnings revisions that illustrate analysts are optimistic about the sector — and yet they’re trading at a discount to the broader market.
The best healthcare stocks to buy nowAmong large caps, Bank of America recommends health insurer Humana, drugmakers Eli Lilly and Vertex Pharmaceuticals, scientific instrument maker Thermo Fisher Scientific, drug distributors McKesson and AmerisourceBergen, and pharmacy benefits manager and drugstore operator CVS Health.
Meanwhile, Hall and Woods sounded a cautious note about the smaller stocks they cover. There have been a lot of small-cap healthcare IPOs recently, which means there are more unprofitable companies in the sector than usual. That hurts quality measurements and makes the sector less defensive than it usually is.
And Subramanian pointed out that active fund managers are heavily overweight healthcare right now, while the market environment looks better for cyclicals than defensive stocks. There is also the threat of cuts to Medicare and other government programs, which could hurt the sector badly. That’s why Bank of America’s strategists are focusing on staying defensive at the moment.
“Our analysts highlight more defensive sub-sectors (e.g. commercial biopharma, managed care, Medicare-focused names, medtech),” Hall and Woods wrote.
Bank of America says the following 16 names are the best defensive and high-upside small- and mid-cap stocks in healthcare. The stocks are ranked from lowest to highest based on how much upside the firm thinks they have relative to its price objectives. Overall, the firm says the stocks could average 50% in potential gains.
All upside figures were calculated based on Thursday’s closing prices.