By Philip van Doorn, MarketWatch
Investors don’t fear Sen. Bernie Sanders as much as they do Sen. Elizabeth Warren in becoming the Democratic nominee for president. Both have proposed massive government spending, including an overhaul of the country’s health-care system, but Sanders has pulled ahead in primaries so far.
Want evidence? Check out the following chart, provided by Marshall Gordon, a health-care industry analyst with ClearBridge Investments:
The green line is the movement of the Real Clear Politics national poll average for Warren as a candidate for the 2020 Democratic presidential nomination, while the white line is UnitedHealth Group’s /zigman2/quotes/210453738/composite UNH -2.41% share price. As Warren has dropped in the polls, UnitedHealth has come roaring back. UnitedHealth is, by far, the largest health insurer and managed-care provider in the U.S.
A sector ripe for a comeback
During 2019, the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.56% returned 31.5%, with dividends reinvested, according to FactSet. The market was led by the information-technology sector, with a whopping 50% return, while the worst-performing sector was energy, up a paltry 12% because of weak oil prices. But the health-care sector was second-worst, returning 21%.
Gordon expects a multiyear increase in price-to-earnings valuations for health-care stocks, because he believes fears of political upheaval for the sector have been overblown, but also because of continued innovation and efficiency improvement. Two stocks he favors for long-term investment are UnitedHealth and BioMarin Pharmaceutical /zigman2/quotes/204560322/composite BMRN -1.49% .
Gordon — who previously worked as an investment banker in Lazard’s health-care group and a medical-industry analyst at Bernstein and Credit Suisse — said during an interview that a radical change to health care in the U.S. was unlikely. Not only would a candidate favoring socialized medicine have to win the presidency, the Democrats would need to maintain control of the House of Representatives, gain control of the Senate and convince Democrats who are against fully socialized medicine to change their minds.
ClearBridge is a subsidiary of Legg Mason /zigman2/quotes/209531190/composite LM -0.12% with $154 billion in assets under management. Gordon assists fund managers with their selection of health-care investments. One example is the ClearBridge Large Cap Growth Fund, whose institutional shares /zigman2/quotes/207007618/realtime LSITX +0.21% have a four-star (out of five) rating from Morningstar. Health-care stocks made up 13% of the fund’s portfolio as of Dec. 31.
Gordon expects continued pressure for “some change to drug pricing,” because of bipartisan support, but also said: “I would not expect it to be catastrophic.”
UnitedHealth is the second-largest company in the health-care sector of the S&P 500, with a market capitalization of $283 billion, trailing only Johnson & Johnson /zigman2/quotes/201724570/composite JNJ -0.54% , which has market cap of $395 billion. Johnson & Johnson, unlike UnitedHealth, has consumer, pharmaceutical and medical devices businesses.
It’s no surprise that Warren’s detailed plans for socialized medicine, “Medicare for All,” frightened off investors from UnitedHealth’s stock. Sanders also supports Medicare for All, but it seems investors aren’t worried now that he leads in the Democratic nomination race. Of course, that (and the media narrative) can change on a dime, following the South Carolina primary on Feb. 22 and especially after Super Tuesday on March 3 when 16 states, including California, hold their primaries.
Biggest and best
Gordon said UnitedHealth has “a long runway for growth for a very long time” as it builds out its health-care services network, and that this business is growing faster than its health-insurance business. “I think the [price-to-earnings] multiple can expand as generalists wake up to the fact that there isn’t going to be a single-payer system soon,” he said.