Healthcare Sector Offers Plenty of Bargains
The Healthcare sector offers plenty of bargains, with a surprising number of the prominent healthcare stocks held by the Health Care Select Sector SPDR (XLV) trading at low prices.
Against a market backdrop where Technology sector stocks have racked up huge gains over the past year-plus, a sector like Healthcare looks like an attractive place for investors to allocate some of their profits if the market rotates and the rally expands beyond big tech.
I’m bullish on XLV based on the inexpensive valuations of the blue-chip Healthcare stocks it holds, as well as the favorable ratings these holdings and the ETF itself receive from TipRanks’ Smart Score system. Plus, XLV is a sensible holding, thanks to its cost-effective expense ratio.
What Is the XLV ETF’s Strategy?
The XLV ETF invests in the stocks that comprise the healthcare sector of the S&P 500 (SPX). This is a broad range of stocks that can include companies in the “pharmaceuticals; health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology industries.”
The fund dates back all the way to 1998 and has $40 billion in assets under management (AUM).
I like the Healthcare sector because its stocks are often defensive and countercyclical. They often feature steady, stable revenue and earnings streams and are less tied to the state of the broader economy than many other stocks. People still need the same medicines, treatments, and medical procedures, whether the economy is doing well or not.
I also like that the sector features quite a few stocks with very appealing valuations, not to mention attractive dividend yields, as we’ll discuss more in-depth in the next section.
If investors rotate out of stocks from sectors where stocks typically have higher valuation multiples, like Technology, then the lower valuations and high yields offered up by Healthcare stocks could make the sector an attractive place for these investors to park some of their gains.
We may already be seeing the beginnings of this dynamic coming into play, as the tech-heavy Nasdaq (NDX) is down 4% over the past week, while the Dow Jones Industrial Average (DJIA), which skews more towards traditional, old economy stocks, is up 0.7% over the same time frame.
This isn’t to say that the tech bull market is over or that it’s time to exit tech trades. However, it illustrates that there are plenty of other sectors of the market that look primed to join in the rally.
A Value Investor’s Paradise
XLV invests in 64 stocks, and its top 10 holdings make up 56.8% of the fund. Below, you can check out an overview of XLV’s top 10 holdings using TipRanks’ holdings tool.
What I really like about XLV’s group of holdings is that it features plenty of stocks that look like downright bargains. While top holding Eli Lilly (LLY), which accounts for 13% of the fund, trades for a nosebleed multiple of 68.6 times 2024 earnings estimates (based on the tremendous success of its blockbuster weight loss drug, Mounjaro), much of the rest of XLV’s portfolio takes on a distinctly value-oriented flavor.
For example, fellow top 10 holding Pfizer (PFE) is very cheap, trading at just 12.4 times 2024 earnings estimates. Pfizer also offers investors a massive dividend yield of 5.7%.
Other top 10 holdings, like AbbVie (ABBV) and Johnson & Johnson (JNJ), trade at very reasonable multiples of just 15.4 and 14.7 times 2024 earnings estimates, respectively. Additionally, they feature attractive dividend yields of 3.6% and 3.2%, respectively.
Looking beyond the top 10 holdings and out to 2025, there are some even more extreme bargains to be found here. Gilead Sciences (GILD) and Bristol Myers (BMY) trade at remarkably cheap levels of 10.0 and 6.0 times 2025 earrings estimates, respectively. Like their peers discussed above, Gilead and Bristol Myers are also attractive dividend stocks in their own right — Gilead yields 4.2% while Bristol Myers yields an enticing 5.7%.
Stocks with these types of undemanding valuations can help give investors significant downside protection in a turbulent market. They also leave plenty of room for upside via valuation multiple expansion if they execute and grow earnings.
In addition to these attractive valuations and tempting yields, XLV’s top holdings also feature formidable Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.
An impressive seven out of XLV’s top 10 holdings feature Outperform-equivalent Smart Scores of 8 or above, and three of its top holdings, Johnson & Johnson, UnitedHealth Group (UNH), and Amgen (AMGN), boast “Perfect 10” Smart Scores. XLV comes in with an Outperform-equivalent ETF Smart Score of 8 out of 10.
A Cost-Effective Choice
Another good thing about XLV is that it offers a very cheap expense ratio of 0.09%, just like its fellow Sector SPDR ETFs. This 0.09% expense ratio means that an investor putting $10,000 into the fund will pay just $9 in fees over the course of the year.
The savings from investing in low-cost funds like XLV can really add up over time. Assuming the ETF maintains its current expense ratio and returns 5% annually over the next 10 years, an investor allocating $10,000 into the fund will pay just $115 in fees over a decade.
Is XLV Stock a Buy, According to Analysts?
Turning to Wall Street, XLV earns a Moderate Buy consensus rating based on 52 Buys, 12 Holds, and one Sell rating assigned in the past three months. The average XLV stock price target of $169.42 implies 14.6% upside potential from current levels.
Looking Ahead
I’m bullish on XLV based on its highly-rated portfolio of Healthcare stocks, many of which offer undemanding valuations and attractive dividend yields. In a market environment where tech stocks have driven significant gains for the broader market, a sector like Healthcare that features cheap stocks with attractive dividend yields could be a sensible place for investors to rotate some of their profits into. This would behoove XLV, making it a smart tactical investment opportunity.
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