Buying Opportunity: Healthcare Stocks P/E Hit 40-Year Low

One equity sector I wanted to do a brief focus on this week is the healthcare sector. The chart below shows the sector’s performance relative to the S&P 500 since mid-2019.

Data points above 100 indicate positive relative outperformance. As seen, in the early stages of the pandemic the group showed solid positive alpha. Since August of this year, the sector has been nearly inline with the broad index, but with a slight upward trending bias.

Now refer to the valuation chart below. Shown here is the price/earnings multiple based on FY2 (roughly calendar year 2021) earnings per share of the healthcare sector relative to the overall market price/earnings (P/E) ratio using the S&P 500.

The chart goes back 30 years, with a couple reference points shown: 

(1) the Clinton health plan and

(2) Obamacare. 

Given the fairly lengthy look back, I believe it gives a good broad historical view of the valuation of this sector relative to the broad equity universe.

The median value over this time span is a relative multiple of 1.07X, so the sector’s P/E has historically had a 7% premium to the overall S&P 500 P/E.

As seen, currently the healthcare P/E is at a very large 23% discount to the market P/E, easily at a 30-year low. In fact, though not shown here, if one looks at the data, it would be found that the sector’s P/E is actually at or near an astounding 40-year low on this relative P/E measure.

Valuation anomaly

Heightened policy uncertainty by investors — as all as concern that healthcare policy will be a major legislative focus after the incoming Biden administration takes office — I believe have truly created a meaningful valuation anomaly for this sector.

If history is any guide these large outlier valuation relationships typically get reverted back to the mean over time. If so, investors could do quite well by being invested in the healthcare space over the coming months and quarters.

Two excellent choices to invest in the overall healthcare sector via a passive ETF are the Vanguard Health Care Index Fund ETF (VHT) or iShares U.S. Healthcare ETF (IYH).

Recommended Articles

FIRE Your Old Financial Life and Retire Early. Here’s How…

A Chicago flight attendant has hit the news for turning her financial life around. At 39, Bianca DiValerio was nearly broke after a divorce and the sale of several failing

Interview: Rates Will Stay Low, Uber ‘to the Moon’

Don't expect the Federal Reserve to even tap on the brakes anytime soon, says Bob Iaccino, editor of the Stock Think Tank. On Thursday, Fed Chairman Jerome threw cold water

3 Crucial Ways to Keep Your Brain Strong Well into Retirement

For people whose whole life has revolved around using their mind, retirement can be a bind. All of those degrees and awards, the presentation notes, the papers, the grand vision

self employed taxes

Help! I’m Self-Employed and My Taxes Are a Mess!

In the not-so-distant past, the word “gig” was used only to describe the work environment for musicians and comedians who would travel from city to city for performances for one

Your Chances of Seeing a Doctor When You Get Sick Are Falling Fast

New studies have emerged that point to a severe shortage of doctors and other vital health workers is on the horizon for the United States. The first report, conducted by the Association

Iaccino: I Took Profits On Bitcoin, but It Has Nowhere to Go But Up

Bitcoin's pull back from recent highs has not dissuaded Stock Think Tank editor Bob Iaccino from owning the cryptocurrency — but he has taken profits. Bitcoin climbed from below $20,000

Facebook Discloses Secret Rules On What Posts Get Blocked — and Why

Ever had a post on Facebook blocked — by Facebook? For the first time, the company is explaining why. The social media giant has now disclosed the once-secret rules on

Iaccino: Buy the Rumors, Sell the Facts On Biden Transition

Bob Iaccino, editor of the Stock Think Tank, says investors should prepare to "buy the rumor and sell the fact" when it comes to plans of the incoming administration of

financial checklist

12 Crucial Money Steps to Take Now for a Better Year Ahead

The beginning of a new year is an ideal time to reset your finances and work towards a more profitable and productive year. Here is a financial checklist with 12

A Simple Strategy to Live Longer by Quitting Work Yet Still ‘Working’

Some see early retirement as the kiss of death, but one study has shown this to be a myth. Retiring early can actually lengthen your life. A 2017 study published in the

deal on new car

Get a Great Deal On a New Car or Truck Using This Tactic

My lease was up on my 2018 vehicle. I was excited to go car shopping. However, what I realized as I ventured out was that the auto industry also has

Renting vs. Buying: What’s Best for Your Retirement?

A white picket fence surrounding a house with 2.4 children, a dog, a cat, a station wagon. This is the American dream. But owning your own home might not be


Gary has more than 30 years of industry experience, which includes research analysis and portfolio management for both retail and institutional accounts. He worked as a Senior Vice President at Wells Fargo Advisors and Wells Fargo Investment Institute for approximately 14 years in total, where he was a senior portfolio manager for both equity and asset allocation portfolios. He was also involved in investment manager due diligence and selection for the firm’s multi-manager portfolio models. Prior to joining Wells Fargo, Gary held senior-level investment management positions with several registered investment advisory organizations. He has been a Chartered Financial Analyst (CFA®) charter-holder since 1989. The CFA is a professional credential earned by investment management professionals after successfully passing three years of rigorous examinations and recording several years as a practising professional within the industry. Gary received his Bachelor of Science in Engineering from Purdue University and his M.B.A. in Finance from The University of Missouri. Additionally, Gary holds his FINRA SIE, Series 7 and Series 66 securities registrations as well as his Missouri Life Accident & Health insurance license. He is a member of the CFA Society of St. Louis and the Financial Executives Networking Group. He resides in Kirkwood, MO with his wife Kathy, and they have three adult age children, Aly, Ryan and Josh.