Health investors get selective as markets churn into 2019

For those looking to pick new investments or add to positions on companies that have fallen out of bed, the time may be now.

The Health Care Select Sector SPDR Fund, known by its ticker XLV, remains up more than 10 percent this year, while the S&P 500 Index erased gains. (Photo: Shutterstock)

(Bloomberg) –Health-care investors may have to be a bit more selective than they’re used to in 2019.

With U.S. health stocks poised to wrap up their second straight year of outperforming the broader market, the focus on hunting for innovation and next year’s winners is even more in vogue after recent market volatility.

Small- to mid-cap biotechnology darlings that saw shares surge amid a seemingly never-ending bull market have been punished and high-flying device makers ran cold, causing some investors to sell out of positions hand over fist.

For those looking to pick new investments or add to positions on companies that have fallen out of bed, the time may be now.

“There’s an opportunity to outperform in health care, but it’s a bit more stock as opposed to industry specific going forward,” BNP Paribas Asset Management portfolio manager Jon Stephenson said in a telephone interview. “We’re trying to find innovation that’s now selling at a discount relative to where it has been trading at, and our relative industry-weight bets have become marginally smaller.”

The S&P 500 Health Care Index fell 1.6 percent at 10:05 a.m. in New York as heavyweight Johnson & Johnson crashed the most since February after a Reuters report that said the company knew for decades that asbestos was sometimes in its baby powder.

Only a handful of stocks in the group traded higher led by Regeneron Pharmaceuticals Inc. after Goldman Sachs upgraded shares to buy.

The Health Care Select Sector SPDR Fund, known by its ticker XLV, remains up more than 10 percent this year, while the S&P 500 Index erased gains.

Even with that outperformance, some groups like large-cap biotech remain near record low multiples, presenting an opportunity, Jefferies health-care specialist Jared Holz noted.

“They’ve gotten hit so hard, how much further down can they go?” he said by phone. “Especially against the backdrop with large-cap pharma names being up a minimum of 20 percent over less than six months, which is fairly unprecedented.”

Here’s where some buy-side and sell-side observers are focused for the coming year:

Biopharmaceuticals

Mizuho ( Salim Syed):

Jefferies ( Jared Holz):

BNP Paribas Asset Management ( Jon Stephenson):

Smead Capital Management ( Bill Smead):

Specialty and generic pharmaceuticals

Mizuho ( Irina Koffler):

RBC Capital Markets ( Randall Stanicky):

Medical devices and tools

Goldman Sachs ( Isaac Ro):

William Blair ( Margaret Kaczor):

Goldman Sachs ( Patrick Donnelly) on life-sciences tools:

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