There’s Eli Lilly ( LLY ) and then everyone else. That’s a simple way to describe the performance of health care clubs so far this year, in what has been a challenging period for the industry. Of the 11 market sectors year to date, healthcare is the fourth most valuable sector, down 4%, followed by consumer staples (down 4.2%), real estate (down 5.8%) and utilities (down 10%). Our top performer is undoubtedly Eli Lilly, which is up 50% in 2023 on the promise of experimental weight-loss and Alzheimer’s drugs, making it the world’s most valuable healthcare company. Lilly’s run really started in last year’s terrible market, soaring more than 30% compared to the S&P 500’s nearly 19.5% drop in 2022. That’s a nearly two-year return of nearly 100%. LLY XLV YTD mountain Year-to-date performance of Eli Lilly stock compared to XLV, the main ETF that tracks the healthcare sector. Lilly’s shadow looms over the likes of GE Healthcare ( GEHC ), Humana ( HUM ) and Danaher ( DHR ) — three companies whose futures remain bright but whose stocks have been dragged down in our portfolio this year for reasons that include the post-Covid era. normalization of the pandemic. Bausch Health (BHC) is a different case. While up more than 30% in 2023, shares of the troubled Canadian pharmaceutical firm had a brutal 2022 — and remain mired in legal limbo for now. Its share price is roughly a third of what it was less than two years ago. The healthcare sector’s underperformance in 2023 can be attributed to a number of factors — not the least of which was its relative success last year, when it fell less than 4% compared to the broader S&P 500, which is having its worst year since 2008. 2022, when the Federal Reserve began an aggressive interest rate hike campaign to try to slow red-hot inflation, health care benefited from its limited sensitivity to swings in the economy. However, this defensive trade lost its luster in 2023 as fears of a recession around the corner subsided and investors began to anticipate the end of the Fed’s tightening cycle. Add in AI optimism, and the conditions were ripe for investors to buy last year’s losers — like tech stocks and other economically sensitive sectors — and take profits from their relative winners, like healthcare. “That helps explain a lot of the turnover we’ve seen this year” in the health care sector, said Ryan Issakainen, an exchange-traded fund strategist at First Trust Advisors, which has health care ETFs. Key Points Healthcare stocks outperformed the broader US stock market last year, but it’s been a much tougher sledding for the sector this year due to various headwinds. Eli Lilly is Club Health Care’s most successful company by a wide margin, buoyed by optimism about experimental weight loss and Alzheimer’s drugs. We feel comfortable owning our three other primary healthcare stocks: GE Healthcare, Humana and Danaher. After this industry-wide rotation emerged earlier in the year, individual corners of the healthcare industry also dealt with their own mix of storm clouds. For example, the Inflation Reduction Act of 2022 weighed on the shares of drug companies whose drugs could be selected for the new Medicare price negotiation program that begins in 2026. That uncertainty persisted until late August, when the agency that runs Medicare announced 10 .selected drugs. “Even if we’re not talking about the individual impact on individual pharma companies’ earnings, there is an overhang of sentiment that is also affecting the sector as these kinds of provisions become a reality,” Issakainen said. “It also affects the psychology and sentiment of investors.” One of Eli Lilly’s type 2 diabetes treatments, Jardiance, was chosen. However, the drug is not the primary reason for the company’s bullish outlook. Favorable developments around Alzheimer’s disease and weight loss drugs were more relevant to the share price and our investment thesis. For Danaher and its peers, which sell products, tools and services used in the drug development process, this year has been affected by a pandemic-related inventory surge and a slowdown in biotech activity, particularly in China. The latter factor in particular has worsened recently and contributed to Danaher lowering its full-year revenue growth outlook for the second time this year in July. A regulatory ruling on Medicare Advantage overpayments was one of the first hurdles for managed care stocks — which include Humana and Dow Stock UnitedHealth Group ( UNH ) — and months later, in mid-June, the group was again hit by growth concerns. medical costs as patients began receiving procedures that had been delayed during Covid. But the other side of that coin are medical technology companies like GE Healthcare, maker of Stryker ( SYK ) orthopedic devices, and Steris ( STE ), which sells surgical instruments and sterilization equipment. An increase in procedures and better hospital staffing have benefited these companies, leaving their shares relatively strong compared to the overall healthcare sector. The medical equipment and consumables index — home to GE Healthcare and two others — has fallen just 1% so far this year. GE Healthcare shares outperformed with a 9.4% year-to-date gain. Considering all the cross-currents in the industry, we feel good about our exposure to healthcare (with BHC as a question mark), especially after we secured some significant gains on part of our Eli Lilly position last week. Simply put, Eli Lilly’s spectacular run this year has spurred our discipline to take off despite lingering confidence in its growth prospects, fueled by its type 2 diabetes drug Mounjaro, which could be approved by the US weight loss regulator later this year, and its Alzheimer’s treatment . , which may be approved by regulatory authorities by the end of the year. “Now we have room … to buy it if something goes wrong short-term, which we think is not too bad,” Jim Cramer added Thursday during the September edition of the club’s monthly meeting. DHR YTD mountain Danaher YTD stock performance. Danaher stock has been a big disappointment — though it’s now down 6% to $249.63 a share on May 16 after a solid move from its closing low of $224.99 in 2023. More gains should be ahead as the thawing IPO market will help some of Danaher’s biotech customers go public and get an influx of capital to invest in drug development — which means orders for its equipment. In addition, the planned acquisition of antibody maker Abcam and the soon-to-be-completed spin-off of Veralto improve the company’s growth profile going forward. “The positive is that there will be a reevaluation at Danaher,” argued Jim. “We’re on top. Buy Danaher.” HUM YTD mountain Humana stock performance YTD. Similar to Danaher, the damage at Humana has improved recently, and bailing from our position at a current stock valuation of around 15 times forward earnings does not seem like the best way forward. Fortunately, the stock is up more than 16% from its mid-July bottom, but has yet to fully recover from the June selloff on leverage concerns. Humana’s shareholder-friendly management team and its rapidly growing Medicare Advantage offering are reasons to stick around. GEHC YTD mountain year-to-date performance of GE Healthcare stock. GE Healthcare is a quagmire. For a year, the return on medical imaging and diagnostics stocks is respectable. The problem is that all of its gains came between January — when it was officially spun off from General Electric ( GE ) — and late April, with a final high of $87.79 per share. It then started to pull back, giving us a chance to initiate our position on May 17th at around $79 per share. The stock has retreated further since then – to the current level of around $64 per share. “What do the dealers think? I don’t know,” Jim said during the monthly meeting. “He is wrong.” We shopped our way down, most recently on September 5th, because our reasons for having a company in the first place remain intact. Among those reasons is its opportunity to benefit from the introduction of Alzheimer’s drugs that target abnormal clumps of a protein called amyloid beta in patients’ brains. Taking these drugs — specifically Biogen’s already-approved Leqembi and Lilly’s donanemab — requires patients to undergo multiple brain scans on MRI machines made by GE Healthcare. GE Healthcare also makes PET scanners and a diagnostic agent called Vizamyl, which together can help measure levels of amyloid beta in the brain. Amyloid has long been associated with Alzheimer’s disease. In recent weeks, analysts at Wells Fargo and Citigroup began covering GE Healthcare with buy ratings. Both launched a number of the company’s products to support the detection and treatment of Alzheimer’s disease. BHC 5Y mountain Bausch Health 5-year performance. Bausch Health’s stock gains over the year weren’t enough to get the company out of our penalty box. And on Monday, it announced that its chief financial officer had resigned to pursue an opportunity at another company. But on Wednesday, BHC received an upgrade from investment bank Jefferies. We’re not there yet – our 4 rating on BHC remains – but it’s still a remarkable challenge. Analysts at Jefferies now rate Bausch Health stock a buy, with their price target raised to $16 per share from $9. That would be about double the current levels. However, as we reported earlier, even at $16, the stock would still need to more than double to reach its 2021 high of $34.38. “I’m not saying we’re buying it. I’m simply saying we’re not sellers at this point,” Jim said Thursday. Jefferies expressed optimism about the company’s ability to overcome legal issues surrounding the patent for its key drug, Xifaxan. With that hurdle, BHC’s path to further monetizing its nearly 90% stake in Bausch + Lomb ( BLCO ) would become “more defined,” Jefferies wrote. While BHC’s sale of eye unit Bausch + Lomb deviated from the script, Jefferies sees a higher likelihood that Bausch Health can unlock more value from BLCO. (Jim Cramer’s Charitable Trust is long LLY, GEHC, HUM, DHR and BHC. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive trade alerts before Jim makes a trade. 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An employee works in a unit dedicated to the production of insulin pens at the factory of the American pharmaceutical company Eli Lilly in Fegersheim, eastern France.
Frederick Florin | AFP | Getty Images
Here is Eli Lilly (LLY) and then there’s everyone else.
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