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Health care: Long-term potential

Key takeaways

  • Excitement surrounding a new category of weight-loss drugs has been a key driver of health care sector returns in the past year.
  • This excitement drove major gains among some stocks over the past year, but delivered losses to some providers of traditional treatments for diabetes and obesity.
  • After a period of lagging the broader market, valuations across much of the sector were recently at attractive levels—creating some interesting potential opportunities.
  • In addition to shifts driven by weight-loss drugs, there may be compelling potential among managed-care providers, as the US health insurance market undergoes long-term change.

The past year may be remembered as a groundbreaking period for the health care sector, due to the excitement surrounding promising new weight-loss drugs that have quickly become highly sought after worldwide. It may also be remembered as a period that divided major perceived “winners” and “losers” of these developments—with investors rewarding drug innovators and punishing some providers of traditional treatments for diabetes and obesity.

This year, it’s impossible to predict what stocks or segments investors may favor. But the health care sector could have a strong setup, given recent low valuations combined with new products and long-term trends that may continue to play out.

Coming off a year of innovation

Just as investor excitement over artificial intelligence drove returns in the technology and communication services sectors in the past year, investor enthusiasm for weight-loss drugs was a key driver behind health care stock returns.

On the upside, stocks of the producers of these drugs experienced significant gains. On the downside, some stocks of health care equipment makers that serve the diabetes market—such as makers of insulin pumps—experienced losses as investors became concerned over how weight-loss drugs might hurt long-term demand for diabetes devices.

Health care utilization also ticked higher as patients who delayed surgeries and treatment during the pandemic continued to seek services in hospitals, doctor offices, and ambulatory care centers in increased numbers. This generally supported groups like health care facilities and medical-device manufacturers, but weighed on the stocks of managed-care health insurers.

More important to sector-level returns, health care as a whole simply has not been in favor with investors in the past year. Health care stocks tend to be viewed as defensive, given that people generally go to the doctor and take their medications regardless of what's going on in the economy. This reputation was a disadvantage in the past year as investors favored mega-cap growth stocks (particularly those of large tech companies seen as potential plays on artificial intelligence), over defensive sectors. This fueled the sector’s overall lagging returns.

Chart shows one-year price performance of the health care sector, compared with that of the S&P 500. As of February 5, 2024, the health care sector had gained 7.3%, compared with the 19.5% gain for the S&P.
Past performance is no guarantee of future results. Health care sector performance is represented by the S&P Health Care Select Sector Index. Data as of February 5, 2024. Source: S&P Dow Jones Indices, a division of S&P Global.

Attractive valuations and long-term potential

Looking ahead, the performance of health care stocks may be heavily influenced by the direction of the broader economy and the current starting point of valuations. While I can't be sure of where the economy is headed, the low starting point of valuations may be a positive for the sector.

Fund top holdings1

Top-10 holdings of the Fidelity® Select Health Care Portfolio () as of December 31, 2023:

  • 9.5% – UnitedHealth Group Inc. ()
  • 9.0% – Boston Scientific Corp. ()
  • 7.3% – Eli Lilly & Co. ()
  • 6.4% – Danaher Corp. ()
  • 4.5% – CVS Health Corp. ()
  • 4.4% – Regeneron Pharmaceuticals Inc. ()
  • 4.3% – Thermo Fisher Scientific Inc. ()
  • 4.0% – Penumbra Inc. ()
  • 3.9% – Cigna Group ()
  • 2.9% – Merck & Co. ()

(See the most recent fund information.)

The new-generation weight-loss drugs, namely Novo Nordisk's Ozempic® and Wegovy®, and Eli Lilly's () Zepbound™ and Mounjaro™, may transform how both diabetes and obesity are treated. Together, these 2 leaders in the space recently had a market capitalization of more than $1 trillion, as of February 13.

The potential market for these drugs is extensive: An estimated 38 million Americans have diabetes (with almost 9 million of those cases estimated to be undiagnosed).2 Some 60 million European adults are estimated to have diabetes,3 while the prevalence in developing markets has been rising. Meanwhile, there are estimated to be more than 500 million obese adults globally.4 As a result, these new weight-loss drugs (which are known as glucagon-like peptide-1, or GLP-1, agonists), could be a large class of drugs for the world for an extended period.

However, investors may have underestimated how long it will take for these drugs to be broadly adopted, and how long it will take for them to potentially hurt demand for existing diabetes and obesity treatments. This has created some interesting opportunities in areas of the market that underperformed on GLP-1 exuberance, including firms like Insulet (),5 which makes insulin pumps, and Inspire Medical Systems (),6 a maker of devices treating sleep apnea. I have also found potential opportunity in firms that support the diabetes and obesity drug market, including life sciences tools and services companies such as Thermo Fisher Scientific (), which makes key components for these injectable medicines.

Another long-term trend I have continued to find interesting is the transformation in health insurance. In the US, a gradual transition has been underway, from a traditional fee-for-service model (in which providers are compensated based on the volume of visits and services they provide) to a value-based model (in which physicians are compensated based on patient outcomes rather than on service volumes). While stocks of managed-care companies were hampered in the past year by some of the short-term headwinds mentioned above, some could be poised to benefit from this long-term transformation. UnitedHealth Group () is one of the largest managed-care health insurers in the US and has been a large portfolio holding over time.

A focus on the long term

No matter where US markets are headed next, the health care sector can offer a combination of defensive and growth characteristics that may be attractive in a variety of scenarios. But my focus remains on the long term—that is, trying to invest in the most innovative areas of health care, where Fidelity's research insights may help deliver material value over time.

Edward Yoon
Sector Leader/Portfolio Manager

Edward (Eddie) Yoon is a sector leader and portfolio manager in the Equity division at Fidelity Investments. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing, and other financial products and services to institutions, financial intermediaries, and individuals.

In this role, Mr. Yoon is responsible for the coverage of health care equipment and supplies stocks, and serves as the health care sector leader. Additionally, he manages several funds including Fidelity Advisor Health Care Fund, Fidelity and Fidelity Advisor Stock Selector Mid Cap Fund, Fidelity and Fidelity Advisor All Cap Fund, Fidelity Select Health Care Portfolio, and Fidelity Select Medical Technology and Devices Portfolio.

Prior to joining Fidelity in 2006, Mr. Yoon worked on the health care team at JPMorgan Asset Management. He has been in the financial industry since 2002.

Mr. Yoon earned his bachelor of arts degree in business economics from Brown University.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. 1. Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown. 2. “National Diabetes Statistics Report: Estimates of Diabetes and Its Burden in the United States,” Centers for Disease Control and Prevention, November 14, 2023, 3. “World Health Organization, Europe: Diabetes,” World Health Organization, accessed on November 21, 2023, 4. “Obesity and overweight: Key facts,” World Health Organization, accessed on November 17, 2023, 5. Fidelity® Select Health Care Portfolio (FSPHX) held a position of 1.57% in this stock as of December 29, 2023. 6. Fidelity® Select Health Care Portfolio (FSPHX) held a position of 1.32% in this stock as of December 29, 2023.

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Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.

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The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The S&P Health Care Select Sector index comprises those companies included in the S&P 500 that are classified as members of the health care sector, with capping applied to ensure diversification among companies within the index.

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