According to Bank of America, healthcare stocks typically do well during economic downturns.
Their solid earnings and low valuations should help healthcare stocks in the near term.
The bank names 16 favorite stocks in this sector, including three that it thinks could double in price.
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Healthcare stocks haven’t had a good year, but Bank of America sees signs the tide is about to turn.
The healthcare sector does well in a recession
The positives of the sector are pretty clear as of this writing, according to Bank of America: healthcare tends to do well during recessions, and Bank of America believes the US economy is taking a turn for the worse.
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Savita Subramanian, head of US equity and quantitative strategy, wrote in a recent note to clients that the healthcare sector outperforms the S&P 500 about 70 percent of the time during a downturn, by an average of 4.6 percent during those periods.
Strategists Jill Carey Hall and Nicolas Woods added in a separate note that downturns are the best economic periods for small-cap healthcare companies, and large-cap healthcare companies tend to do even better.
The healthcare sector has had the highest earnings growth recently
Subramanian said there are five key takeaways for the sector today, starting with its historical performance during downturns. She also wrote that the sector is stable and defensive with strong earnings growth.
“Both the volatility of earnings and the frequency of earnings declines are well below the S&P 500,” she writes. “Healthcare has historically delivered the strongest earnings growth of any sector, even outperforming tech in recent quarters, where earnings are under pressure.”
She also explained that over the past five years, healthcare companies have beaten Wall Street’s earnings forecasts more often than the S&P 500 as a whole. In addition, corporate earnings revisions should show that analysts are bullish on the sector – yet they are trading at a discount to the broader market.
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The best healthcare stocks to buy
Among the large caps, Bank of America recommends the health insurer Humanathe drug manufacturers Eli Lilly and Vertex Pharmaceuticalsthe manufacturer of scientific instruments Thermo Fisher Scientificthe drug distributors McKesson and AmerisourceBergen and the pharmacy operator CVS Health.
Hall and Woods, meanwhile, have been cautious about the smaller stocks they oversee. Healthcare small-cap IPOs have been plentiful lately, meaning the sector has more unprofitable companies than usual. This hurts the quality measurement and makes the sector less defensive than usual.