Value finally trumps fear for health stocks

Strong results from UnitedHealth, Johnson & Johnson help investors look past Obamacare and opioid legal issues.

  • By Charley Grant,
  • The Wall Street Journal
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One of the stock market’s most frail patients suddenly appears to be in excellent shape.

Health-insurance bellwether UnitedHealth Group (UNH) reported sales of $60.4 billion and adjusted earnings of $3.88 a share on Tuesday morning. Meanwhile, pharmaceuticals, devices, and consumer health giant Johnson & Johnson (JNJ) reported $20.7 billion in revenue and adjusted earnings of $2.12 a share. Both companies topped analyst expectations and raised full-year profit guidance.

The good news sent their shares higher on Tuesday, with UnitedHealth rallying more than 8% and lifting health care-related stocks across the board.

That good news was badly needed: Health care had lagged behind the S&P 500 (.SPX) by nearly 15 percentage points this year through Monday. Only energy stocks have fared worse over that period. But impressive business results can narrow this divergence by only so much. Health sector earnings have in fact been strong all year. It has been courtrooms and campaign rhetoric that have acted as a drag.

Johnson & Johnson faces lawsuits from more than 100,000 plaintiffs over product-safety issues and marketing tactics. They are hardly alone: Drug manufacturers, distributors and pharmacies face the threat of multibillion-dollar judgments or settlements to resolve their roles in the opioid crisis. A highly-anticipated trial over opioids is set to begin next week in Ohio. Generic-drug manufacturers, meanwhile, face a continuing federal investigation into price-fixing allegations.

Meanwhile, the Trump administration is questioning the Affordable Care Act’s legality in court. While many previous challenges have failed, the threat is real. The law has fostered an ideal business environment for health companies by expanding access to care and not imposing controls on prices. Losing that legal framework would make the sector’s growth prospects far less appealing.

If that weren’t enough, the 2020 elections are approaching and candidates perceived to be hostile to the sector such as Sen. Elizabeth Warren, have done well in the polls. Politicians on both sides of the aisle have proven eager to threaten new controls on drug companies perceived to be charging too high of a price.

On the bright side, the sector’s weak performance has made for relatively cheap stocks. Given their strong earnings backdrop, health-care stocks could rally sharply if the news starts to improve. Perhaps the opioid cases will settle on favorable terms, or Sen. Warren will unveil a health care plan that is less draconian than investors currently imagine.

That strategy will require patience, though, with the election still more than a year away.

Riding out political storms is far more attractive for stockholders when underlying business performance is robust. Tuesday’s results showed that the business of health care is as strong as ever.

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