One of the most compelling choices for analysts and fund managers looking ahead to potential outperforming sectors in 2024 is healthcare. The reasoning behind this pick is unequivocal. Healthcare lagged behind the broader market in the previous year and is poised to benefit from recent market expansion, sector mean-reversion tendencies, and its classic defensive nature. Healthcare spending remains robust even during economic slowdowns, a likely scenario anticipated later this year.
While the case for the healthcare sector is evident, a significant portion of the anticipated rebound has already materialized, as evident from the 1-year performance chart for the Healthcare Select Sector SPDR Fund (XLV).
Despite the sector’s underperformance and its resilience in uncertain times, cautious consideration is warranted. Buying into an asset already at a conspicuous 52-week high and having recorded a nearly twenty percent gain in recent months may not be prudent. Furthermore, XLV, as an ETF tracking a sector index, incorporates various components such as hospital stocks, whose prospects are somewhat tethered to the economy. Although healthcare usage remains consistent during challenging times, the ability to settle medical bills can be a different matter.
For investors seeking opportunities in healthcare, delving into more specialized areas within the sector may be advantageous. A prominent example is biotechnology, which, like the broader healthcare sector, has experienced a robust resurgence in the widely popular industry ETF, iShares Biotechnology ETF (IBB), over recent months; in fact, even outperforming the sector fund:
Investing in either XLV or IBB should not be discouraged; however, for those pursuing higher potential returns with an elevated level of risk, individual biotech stocks could provide a better alternative, either as a standalone investment or as a modest proportion of an overall healthcare portfolio. Although numerous options abound, a segment within biotech that has yet to participate in the rally may appeal to institutional investors seeking undervalued, recession-resistant entities early this year.
So-called “platform stocks” – firms owning platforms for new drug development rather than commercial therapies – were highly sought after a few years ago. The success of companies like Moderna (MRNA) in swiftly developing Covid vaccines during the pandemic underscored the advantages of possessing adaptable platforms which gained substantial market favor. However, the excessive surge in platform stocks, typical of many pandemic-related plays, was met with an equally exaggerated sell-off. It could be argued that the ensuing sell-off might also be excessive at this stage.
Consider a company like Intellia Therapeutics (NTLA) based in Massachusetts, specializing in gene editing. Its stock surged to over $175 during the post-pandemic platform boom and then swiftly retracted to approximately $30. While the market overreaction to $175 is evident, the inherent potential persists. Drug development inherently entails substantial risk, but the success of a breakthrough product compensates for a myriad of failures. In gene editing, such a breakthrough appears imminent. Of course, NTLA isn’t the sole contender for achieving this breakthrough. Other firms harbor similarly promising candidates, notably CRISPR Therapeutics (CRSP). However, the recent strong rally in their stock aligns with the sector trend and thus does not meet the criteria for an undervalued healthcare stock yet to fully catch up with the market.
Opting for a diversified selection of platform stocks could be a sound strategy to increase the possibility of owning shares in the firm that discovers the next blockbuster drug. However, for a more targeted investment approach, a stock like NTLA may offer a solution. While it should not constitute a full portfolio allocation, it can certainly serve as a high-risk, potentially high-return supplement to your investment portfolio.