After beating the market in 2011, healthcare stocks may struggle for a repeat performance this year as cash-strapped Americans keep putting off use of medical services and investors seek out faster growth stocks as the economy improves. So far this year, healthcare has underperformed the broader market: The Standard and Poor's Healthcare index is up about 4 percent compared to a 7 percent increase for the S&P 500 index.
Last year, the healthcare index rose 10 percent compared with little change for the broader market, as investors sought out shares of pharmaceutical companies and health insurers as a defensive play against the market's volatility. "If the stock market is better, which we do believe it will be given the first five weeks, then healthcare will participate but will not be a leader," said David Katz, chief investment officer of Matrix Asset Advisors.
A rebounding US economy could lead patients to resume doctor visits and elective procedures they had been putting off, which would benefit medical device makers, drug companies and healthcare providers such as hospitals. But that trend may take a while to materialize.
Meanwhile, a few companies that seem poised for particularly strong earnings growth are capturing interest, including Intuitive Surgical and Edwards LifeSciences.
Investors expected a pick-up in the use of medical services at the start of 2012, but that trend did not emerge in financial reports by large healthcare companies over the past few weeks, Nuveen Asset Management analyst Tim Nelson said.
"Generally, we've seen no real tangible evidence in improvement in the propensity of the consumer to go see the doctor, or be admitted, or to have a procedure," Nelson said.
Les Funtleyder, portfolio manager for Miller Tabak & Co, said any sign of an uptick in medical services is the main factor he is watching for in the sector. "That's generally good for almost everybody except for the HMOs," Funtleyder said, referring to health insurers. "If the economy stays weak HMOs will be alright."
The fewer medical services health plan members use, the lower the claim costs for health insurers, driving up profits.
"The areas we have favored most in healthcare have been the HMOs," said Jason Norris, senior vice president of research at investment advisor Ferguson Wellman, who likes Humana Inc and Aetna Inc. "We just think their business model is very attractive right now and don't see that changing."