Perhaps one of the more surprising stock market trends post-election has been the relative inability for the healthcare sector to get back on track after taking a beating during the campaign season. With government deregulation on the way, as well as a bipartisan bill having passed Congress late in 2016 that will serve to loosen the FDA drug approval process, rational minds might have expected healthcare stocks to stage a large rally, much has been the case with banking stocks (same thesis; rolling back the regulations put in place post-recession).
We have seen a bit of a pickup in recent days, but after an initial one-day surge on November 9th, healthcare stocks have been lagging generally. I fully expect that 2017 will be a much better year for the sector. Abusive drug price increases will surely still get the attention on lawmakers, but that practice should come to somewhat of a halt now that the industry has seen what can happen to the likes of Valeant (VRX).
While investors will have to temper their growth rate expectations for pharmaceutical-related companies, the fundamental demand story should remain intact longer term. The strong companies should have no trouble churning out consistent sales and strong cash flow. Doing so will prove to investors just how resilient the industry can be, and should result in more normal valuations for most players in the sector.
To give you an example of how strange some of the price action has been in these names, consider one that I have been accumulating recently, both personally and for clients: CVS Health (CVS). This leading healthcare name has seen its share price take a stunning downward turn, from over $100 to as low as $70 per share. It's hovering around $80 currently.
CVS is not some small drug company with a few products that has grown by dramatically increasing prices. We are talking about a blue-chip franchise with leading positions in both retail drugstores and pharmacy benefit management. The historical record of shareholder value creation is impressive. From a long-term demographic perspective, CVS stands to benefit greatly from drug innovations and an aging population.
And yet somehow the stock is currently fetching just 14 times annual earnings, a whopping 30% discount to the S&P 500 index. With overall valuations in the market in the upper band of the historically normal range, CVS looks like quite a bargain, even as the sector has been a focal point for criticism. While stocks like this have hurt investor performance lately, myself included, I see little reason to think 2017 cannot be the start of a healing process for an excellent American company like CVS Health.