It was a bruising quarter for global Health Care stocks, with the sector underperforming the MSCI All Country World Index by the most in more than 25 years, as fears spread over shifting US policies and the country’s cuts to funding for medical research. But Health Care has weathered storms before.
In the chart above, the gray bars are the cash flow return on investment (CFROI) of companies in the sector for each year since 1999. The gray line is the sector’s average valuation—a blend of price-to-earnings, price-to-book, and price-to-cash-flow ratios—relative to the broader index. What the data show is that despite a series of political and regulatory developments that spooked investors (the portions shaded purple) over the past two-and-a-half decades—from the roll out of the Affordable Care Act to the COVID-19 pandemic—the profitability of the underlying businesses in the sector has been remarkably stable.
Health Care stocks are now trading at some of their most attractive levels relative to the broader market in decades. And while investor sentiment can be fragile, the long-term reasons to own Health Care companies remain intact, including that aging populations with unmet medical needs continue to fuel demand for treatment options. ∎