Broadly speaking, the healthcare sector’s returns in 2022 are middling. In theory, that shouldn’t be the case because the group usually isn’t vulnerable to two of the scenarios plaguing markets today: high inflation and Russia’s war against Ukraine.
One way of interpreting the above is that there’s some value to had among healthcare equities and the related exchange traded funds, including the Invesco S&P 500 Equal Weight Health Care ETF (RYH ). RYH isn’t setting the world ablaze this year, but it is performing less poorly than the S&P 500.
Fortunately, there is a valuation case for RYH along with some attractive fundamentals, which indicate that the equal-weight ETF could get its act together as 2022 moves forward.
“However, we continue to view the valuation in the sector as split between a general undervaluation in the larger biopharma group and an overvaluation in the device and diagnostics industries,” says Morningstar analyst Damien Conover. “While the biopharma valuations imply a high degree of risk involving potential changes in U.S. healthcare policies targeting drug prices, we see this threat as fading, especially as other priorities increase in the U.S. Further, the fundamental outlook for biopharma firms remains strong, with low patent exposure and several new innovative drugs launching and gaining market share.”
The $971.1 million RYH allocates about 26% of its combined weight to pharmaceuticals and biotechnology stocks. Regarding value opportunities, some critics assert that value tilts are the reason that equal-weight ETFs outperform.
That’s debatable, and specific to RYH, the fund devotes about 31.50% of its weight to stocks with the value designation. That’s by no means excessive, and is in fact below the nearly 34% it allocates to growth fare.
RYH is home to 67 stocks, including some that Morningstar’s Conover is bullish on. That group includes biotech giant Biogen (NASDAQ:BIIB).
“The market is overly concerned with the increasingly challenging outlook for Alzheimer’s drug Aduhelm, but Biogen is well positioned elsewhere. The firm leads the $20 billion global multiple sclerosis market with Avonex, Plegridy, Tysabri, and Tecfidera, and the launch of Vumerity partly protects the Tecfidera franchise from generic headwinds,” Conover notes.
Conover is also constructive on Zimmer Biomet Holdings (NYSE:ZBH), another RYH member firm.
“With the addition of smaller competitor Biomet, Zimmer is the undisputed king of large-joint reconstruction, by far. We expect favorable demographics, which include aging baby boomers and rising obesity, to fuel solid demand for large-joint replacement that should offset price declines,” notes the analyst.
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