Investors should buy healthcare stocks as they are too cheap to ignore, DataTrek says

• US healthcare stocks should be bought by investors as the sector is too cheap to ignore, DataTrek Research said in a note on Wednesday.
• “Based on its sub-14 percent weighting in the S&P 500 and stable earnings outlook, healthcare is cheap enough to overweight here,” DataTrek co-founder Nicholas Colas said.
• Risks do exist in the sector, like regulatory changes in 2021 and more failures in the race for a COVID-19 vaccine, but those downside scenarios seem to already be discounted based off of current valuations, according to DataTrek.
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Investors should take advantage of the current discount in healthcare stocks and buy them, DataTrek Research said in a note on Wednesday.

Based on the sector’s current S&P 500 weighting, healthcare stocks have room to run. Healthcare stocks currently make up 13.9% of the S&P 500, “which is an unusually low weight as compared against recent history,” DataTrek co-founder Nicholas Colas said.

The average month-end weighting of healthcare stocks within the S&P 500 is 14.6% in 2020, and over the last five years the sector has sported a weighting of as high as 15.8%. 

While the healthcare sector’s allocation weight in the S&P 500 has been falling, its earnings power has outpaced the S&P 500 as a whole over the last five and 10 years, according to DataTrek. 

The sector is only one of two sectors where analysts expect at least mid-single digit earnings growth in 2020, DataTrek said. The other is technology.

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And so far in October, the sector has lagged the S&P 500 by almost 2 percentage points in terms of performance. 

The takeaway is that "based on its sub-14 percent weighting in the S&P 500 and stable earnings outlook, Health Care is cheap enough to overweight here," Colas said, adding that the sector is not often this small a piece of the index. 

But there are risks associated with healthcare stocks investors should know, DataTrek observed, highlighting political and regulatory risk in 2021 depending on the outcome of the November election, and trial pauses or failures in the race for a COVID-19 vaccine.

Just this week, both Johnson & Johnson and Eli Lilly temporarily paused their respective COVID-19 vaccine and therapeutics trials due to concerns on safety. 

"But at current valuations, those seem adequately discounted to consider an overweight in the group," DataTrek concluded.