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Health Care
| The Health Care Sector encompasses two main industry groups. The first includes companies who manufacture health care equipment and supplies or provide health care related services, including distributors of health care products, providers of basic health-care services, and owners and operators of health care facilities and organizations. The second regroups companies primarily involved in the research, development, production and marketing of pharmaceuticals and biotechnology products. |
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Actual market weightings for each sector are based on the S&P 1500.
**The Market Analysis, Research and Education (MARE) group is a unit of Fidelity Management & Research LLC.
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Sector Commentary from Standard & Poor's
11/15/2009
S&P recommends marketweighting the S&P 500 Health Care sector. Year to date through October 23, the S&P Health Care Index, which represented 12.4% of the S&P 500 Index, was up 7.9%, compared to a 19.5% rise for the S&P 500. In 2008, this sector index fell 24.5%, versus a 38.5% decline for the 500. There are 10 sub-industry indices in this sector, with Pharmaceuticals being the largest, at 52.2% of the sector's market value.
S&P Equity analysts have a positive fundamental outlook on the sector based largely on a positive outlook for the Pharmaceuticals sub-industry, the sector's largest. We see improving pharmaceutical sales and earnings trends in 2010, helped by the likelihood of more favorable foreign exchange, firmer pricing, new products and ongoing cost controls. On the regulatory front, we think potential health care reform could be net neutral or modestly positive, with new taxes and price discounts more than offset by new business from extended health insurance coverage for 30 million currently uninsured Americans. However, the sector still faces a major patent cliff in 2011-2013. We favor the shares of firms with well-defined growth prospects and generous dividend yields. The sector's 2010 estimated P/E of 11.2X represents a discount to the broader market's P/E of 14.6X. The Health Care sector is forecast to post 13% EPS growth in 2010. Its P/E-to-projected-five-year EPS growth rate (PEG) ratio of 1.2X is below the market's PEG ratio of 1.5X. This sector's marketweighted S&P STARS average of 3.9 (out of 5.0) is above the average 3.7 for the S&P 500.
The S&P GICS Health Care Index has broken above key trendline resistance drawn off the peaks since January 2008. While we think this opens the door for a move to chart resistance up in the 350 to 360 zone, that is only about 10 to 20 points above recent prices. Once prices reach 350 to 360, we believe there could be an extended price consolidation or pullback as the chart resistance appears heavy to us and represents key pivot lows in 2005, 2006, and 2008. Relative strength versus the S&P 500 is still in a downtrend from a longer-term perspective, and just went to its lowest level since October 2008. We are neutral on Health Care from a technical perspective.
In summary, we recommend marketweighting this sector as we believe an improving fundamental outlook is offset by a neutral technical outlook.