Despite trailing behind the S&P 500 Index for the last three years, it seems that health care stocks are now turning the tables since 2025 began, though the gain remains marginal. In contrast to the S&P 500’s 14% decrease from the start of the year up until April 7th, health care stocks have seen a less pronounced dip, losing only 2% in the same period.
Our personal preference when it comes to health funds is the Fidelity Select Health Care Portfolio (FSPHX). However, it’s noteworthy that this fund, part of our coveted Kiplinger 25 list of best no-load mutual funds, is slightly behind the sector index for the year so far.
Yet, it’s important not to discount the fund’s performance in the last year. Despite a decline of 6.9%, FSPHX has managed to stay ahead of 65% of it’s competitors, thereby demonstrating resilience in a tumbling market.
The recent performance of medical device manufacturers, such as Boston Scientific (BSX), have contributed to the fund’s strength, with shares seeing a significant growth. Additionally, some biotech entities, like Alnylam Pharmaceuticals (ALNY), have also added to the portfolio’s performance.
However, the performance of managed care companies, including UnitedHealth Group (UNH), has been less than stellar. A cloud of uncertainty hovers over these entities due to ever-changing government policies, particularly those regarding Medicare, causing a lag.
Inflation in 2024 led to an increase in costs for these managed care companies, and it turned out that the government’s Medicare Advantage reimbursements failed to catch up, adding to the companies’ burdens.
The current favorites in the market are firms that continue to report rising demand for their products or services, coupled with growing free cash flow. This financial data point refers to the surplus revenue after fulfilling operation expenses and reinvestment to maintain or expand business activities.
The shining performance for the health stocks now seems like a comeback after being beaten down in the aftermath of the last year’s election. In the final quarter of 2024, as the S&P 500 rose by 2.4%, these stocks faced a drastic deceleration falling by 10%.
One can also notice a gradual broadening of the market. If this trend is to persist, the sector only stands to benefit from it. Sure, similar statements have been made in the past, and yet, the potential for a positive upturn for health stocks cant be ignored.
However, it should be noted that significant evolution has occurred within the health sector. At a time when everyone had turned a skeptical eye towards the healthcare industry, innovative practices have been implemented. Companies that were previously not profitable are now generating revenue, which could contribute to a surge in stock prices.
This influx in profitability among companies should not be overlooked. Such a boost in the economic phase of the sector could serve as a potential catalyst for a steady escalation in stock prices.
Despite these developments going under the radar, there is an undeniable evidence of change within the health sector. Today, we see companies that were once struggling to break even, now making profits. These profit-making entities could be potent propellants pushing the stock prices up.
Since 2008, the manager’s tenure has seen a robust yearly return of 12.5%. This return has eclipsed that of the typical health fund as well as the S&P 500, a clear demonstration of substantial growth within the health sector.
To conclude, it’s important to consider the health sector from a broader perspective. It has shown resilience amidst adversity, and with the current market trends broadening, the sector is positioned favorably for potential growth.
There’s no question that health stocks have endured their fair share of turbulence in recent times. Nevertheless, with advances in innovation and improvement in company profitability, the future could very well hold a prosperous outlook for investors in this particular sector.