Earlier this month, I included a “spoiler alert” in one of our notes saying that we’d talk more about healthcare stocks. Today is that day. When it comes to an ETF, the Health Care Select Sector SPDR (XLV) is a common choice among investors, writes Bret Kenwell, US investment analyst at eToro.
(Editor’s Note: Bret is a new contributor to the Top Pros’ Top Picks roster. I hope you enjoy his commentary.)
As a sector, healthcare may not command as much attention as tech or financials, but it’s a group that many investors are familiar with on an individual stock basis. Pfizer Inc. (PFE) and Moderna Inc. (MRNA). UnitedHealth Group Inc. (UNH) and Johnson & Johnson (JNJ). Eli Lilly and Co. (LLY) and Novo Nordisk A/S (NVO).
These businesses have become household names, as well as well-known stocks among market participants depending on the news cycle — I’m talking Covid-19, Ozempic, etc.
Health Care Select Sector SPDR (XLV)
XLV's top holdings include LLY, UNH and JNJ, followed by AbbVie Inc. (ABBV) and Merck & Co. (MRK). Those five holdings make up about 40% of the fund.
There are only three sectors that analysts expect to generate approximately double-digit earnings growth in each of the next six quarters: Tech, Communications, and yep, you guessed it — Healthcare.
I say “approximately double-digit earnings growth” because these are estimates. Estimates are not only prone to change, but prone to change often. For the healthcare sector over the next six quarters, Bloomberg estimates call for year-over-year earnings growth of: 9.7%, 21.2%, 46.3%, 15.3%, 18.1% and 13.3%.
Those are very strong expectations, and while these estimates may not come to fruition, they lay out a roadmap of impressive growth potential. When we dig further into the sector, the industries driving that earnings growth include biotech and pharma, healthcare equipment and supplies, and healthcare providers and services.
Not surprisingly, those make up a huge part of the overall sector, but it helps speak to why analysts are so optimistic on the space.
The healthcare space currently trades at about 19.5 times forward earnings. That’s on the high end of its range when looking back over the past four years. Investors will have to decide if that valuation is worth paying for these growth expectations.
Investors who are willing to do the work and dig into these groups can likely uncover a hidden gem (or two). However, others who decide they feel bullish may feel more comfortable casting a wider net in the form of a fund or an ETF.
