The heartbeat of the Health Care sector (one of 10 sectors of the S&P 500 Index) is pumping up tremendous gains and is on a historic run. And the rate of M&A deals is hitting all-time highs as well.
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“Since the end of 2010, the S&P 500 Health Care sector has been the stellar performer, rising 144% in price compared to the S&P 500’s 69% advance, while six of 10 sectors underperformed the broader market,” Sam Stovall, U.S. Equity Strategist at S&P Capital IQ said in a July 20 report.
In addition, Stovall points out that the Health Care sector has beaten the 500 in each of the past five calendar years (including this one), something no other sector can boast. In addition, Health Care’s weighting within the S&P 500 is now 15.5%, which is near its all-time of 15.9%, and is 45% higher than it was in early 2011, according to Stovall.
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Most recognize the fact that this sector has had such a significant run in 2015 due mainly to the enactment of the Affordable Care Act (ACA) and that will apparently be in play for many years to come.
Another major factor for this aggressive movement has been the heightened volume of M&A deals which has been a boon to the sector.
“U.S. Health Care M&A totals $347 billion this year-to-date, and never in a YTD period has a sector had so much volume as Healthcare,” says Dealogic. The next biggest YTD volume for the top sector was Telecoms with $292 billion in 1999 YTD.
In fact, Dealogic reports that U.S. Health Care volume this YTD exceeds all full year volumes for the top sector in every year except 1999, when Telecoms finished the year on $462 billion, including exceeding last year’s full year volume for U.S. Health Care which was $323 billion.
Jason Gerberry, Managing Director, Equity Research at Leerink Partners believes there will continue to be significant M&A activity this year as well as next year.
“We see Allergan poised to engage in major M&A activity with Monday’s divestiture of their generics unit, which cleaned their balance sheet arming them with cash to pursue high growth biopharma targets,” notes Gerberry.
He also points out that Pfizer (PFE) has communicated a desire to do a tax inversion deal and may look to engage in “a merger of equals,” which gets around any of the restrictions outlined in the U.S. Treasury Notice (Sept. 2014).
Meanwhile, Stovall believes a partial explanation for health care’s weighting upsurge is due to widening representation by the high-growth biotech sub-industry from a sub-10% weighting in 2001 to a near 22% exposure today.
And Gerberry is of the opinion that: “some of these biopharma companies that have redomiciled to Ireland (for tax purposes) may look to move quickly and acquire U.S. biopharma companies before the U.S. enacts any legislation that prevents these companies from the practice of EPS stripping, e.g. using debt to shield taxes on U.S. derived profits.”
Stovall also notes that: “Despite a near doubling in weighting since early 2011, we [S&P Capital IQ] still recommend an overweighting to Health Care.”
As of the close of the market yesterday, the Health Care sector was still the leader of the pack YTD, up 9.1%, with Consumer Discretionary not far behind, up nearly 8.4%.