(*5*)(*5*)There’s Eli Lilly (LLY), after which there’s everybody else. That is a easy option to describe the performance of the Club’s health-care holdings to date this 12 months, in what’s been a difficult period for the industry overall. Of the 11 market sectors 12 months up to now, health care is the fourth worth-worst performer, falling 4%, followed by consumer staples (down 4.2%), real estate (down 5.8%) and utilities (down 10%). Our standout is certainly Eli Lilly, which has soared 50% in 2023 on the promise of its experimental weight-loss and Alzheimer’s drugs, making it the most-valuable health-care company in the world. Lilly’s run really began in last 12 months’s terrible market, soaring greater than 30% in comparison with the S & P 500’s nearly 19.5% plunge in 2022. That is a nearly two-year return of just about 100%. LLY XLV YTD mountain Eli Lilly’s year-to-date stock performance compared with the XLV, a major ETF that tracks the health-care sector. Lilly’s shadow looms large over the likes of GE Healthcare (GEHC), Humana (HUM) and Danaher (DHR) —three firms whose futures remain vibrant, but whose stocks have nonetheless been drags on our portfolio this 12 months for reasons that include post-Covid pandemic normalization. Bausch Health (BHC) is a different case. While bouncing greater than 30% in 2023, shares of the troubled Canadian pharmaceutical firm had a brutal 2022 — and, for now, remain stuck in the legal mud. Its stock price is about a third of what it was lower than two years ago. The health-care sector ‘s underperformance in 2023 might be chalked as much as a number of aspects — amongst them its relative success last 12 months, when it fell lower than 4% compared with the broader S & P 500, which had its worst 12 months since 2008. In 2022, as Federal Reserve commenced an aggressive interest-rate-hiking campaign to attempt to decelerate red-hot inflation, health care benefited from its limited sensitivity to swing in the economy. That defensive trade, nonetheless, lost its luster in 2023, as concerns subsided about an around-the-corner recession and investors began anticipating the end of the Fed’s tightening cycle. Add in the artificial intelligence optimism, and the conditions were ripe for investors to purchase last 12 months’s losers — equivalent to technology stocks and other economically sensitive sectors — and take profits in their relative winners, like health care. “That helps to clarify a big portion of the reversal we’ve seen this 12 months” in the health-care sector, said Ryan Issakainen, an exchange-traded fund strategist at First Trust Advisors, which has a health-care ETF . Key points Health-care stocks outperformed the broader U.S. stock market last 12 months, but this 12 months it has been much-tougher sledding for the sector resulting from a number of headwinds. Eli Lilly has been the best-performing Club health care stock by a substantial margin, driven optimism around its experimental weight reduction and Alzheimer’s drugs. We feel comfortable owning our three other primary health care stocks: GE Healthcare, Humana and Danaher. After this sector-level rotation emerged early in the 12 months , individual corners of the health-care industry have also contended with their very own mixture of storm clouds. For instance, the Inflation Reduction Act of 2022 weighed on the stocks of pharmaceutical firms whose drugs may be chosen for Medicare’s latest price-negotiation program , which kicks in 2026. That uncertainty lingered until late August, when the agency that runs Medicare announced the 10 chosen drugs. “Even when we’re not talking about the individual impact on revenue for individual pharmaceutical firms, there’s a sentiment overhang that also impacts the sector as these kinds of provisions grow to be a reality,” Issakainen said. “It impacts investor psychology and sentiment, as well.” Considered one of Eli Lilly’s type-2 diabetes treatments, Jardiance, was chosen . Nevertheless, the drug is not a primary reason for bullishness on the company’s long-term prospects. Favorable developments around Alzheimer’s and weight-loss drugs carried more importance for its stock price and our investment thesis. For Danaher and its peers that sell products, tools and services used in the drug development process, business this 12 months has been impacted by pandemic-related inventory build-ups and a slowdown in biotechnology activity, especially in China. The latter factor, in particular, has worsened recently and contributed to Danaher in July cutting its full-year sales growth outlook for the second time this 12 months. A regulatory decision on Medicare Advantage overpayments was amongst the early hurdles for managed care stocks — which incorporates the likes of Humana and Dow stock UnitedHealth Group (UNH) – then months later, in mid-June, the group got slammed again on concerns about rising medical costs, as patients began getting procedures that had been postpone during Covid. The opposite side of that coin, though, is medical-technology firms equivalent to GE Healthcare, orthopedic device maker Stryker (SYK) and Steris (STE), which sells surgical instruments and sterilization equipment. The rise in procedures and improved staffing in hospitals has benefited these firms, making their stocks relatively strong performers compared with the health-care sector overall. Indeed, the health-care equipment and supplies industry index — home to GE Healthcare and the other two — has fallen just one% to date this 12 months. Shares of GE Healthcare have outperformed, with a 9.4% year-to-date gain. Considering all the industry crosscurrents, we feel comfortable with our health-care exposure (with BHC as a query mark), particularly after locking in substantial profits on a part of our Eli Lilly position last week. Simply put, Eli Lilly’s magnificent run this 12 months prompted our discipline to kick in despite remaining confidence in its growth prospects driven by its type-2 diabetes drug Mounjaro , which could see U.S. regulator approval for weight-loss later this 12 months, and its Alzheimer’s treatment , which could also be approved by regulators before year-end. “Now we have room … to purchase it if something short-term goes flawed that we don’t think is that horrible,” Jim Cramer added Thursday during the September edition of the Club’s Monthly Meeting. DHR YTD mountain Danaher year-to-date stock performance. Danaher’s stock has been a major disappointment — though it’s now down 6% for the 12 months, at $249.63 per share, after a solid move off its 2023 closing low of $224.99, on May 16. Additional gains must be ahead because the thawing IPO market will help a few of Danaher’s biotech customers to go public, receiving an influx of capital to take a position in drug development – which, by extension, means orders for its equipment. Moreover, its planned acquisition of antibody maker Abcam and soon-to-be-completed Veralto spin-off improve the company’s growth profile going forward. “A positive is re-rating is about to occur for Danaher,” Jim argued. “We’re on the cusp of it. Buy Danaher.” HUM YTD mountain Humana year-to-date stock performance. Just like Danaher, the damage in Humana has improved recently, and bailing on our position at the stock’s current valuation around 15 times forward earnings doesn’t appear to be the best path forward. Fortunately, the stock has advanced greater than 16% off its mid-July bottom, however it’s not fully recovered from the June sell-off on utilization concerns. Humana’s shareholder-friendly management team and its fast-growing Medicare Advantage offering are reasons to stay around. GEHC YTD mountain GE Healthcare’s year-to-date stock performance. GE Healthcare is quagmire. For the 12 months, the return on shares of the medical imaging and diagnostics are respectable. The problem is all of its gains got here between January — when it was officially separated from General Electric (GE) — and late April, with a closing high of $87.79 per share. Then it began to tug back, which gave us a probability to initiate our position May 17 , at around $79 per share. The stock has since retreated further — to current levels around $64 per share. “What are the sellers pondering? I do not know,” Jim said during the Monthly Meeting. “They’re flawed.” We have been buying on the way down, most recently on Sept. 5 , because our reasons for owning the company in the first place remain intact. Those reasons include its opportunity to profit from the rollout of Alzheimer’s drugs that concentrate on abnormal clumps of a protein called amyloid beta on patients’ brain. Taking these drugs – specifically, the already-approved Leqembi from Biogen and Lilly’s donanemab – requires patients to undergo multiple brain scans in MRI machines, which GE Healthcare makes. GE Healthcare also makes PET scanners and a diagnostic agent called Vizamyl that, together, will help measure levels of amyloid beta on the brain. Amyloid has long been linked to Alzheimer’s disease. In recent weeks, analysts at Wells Fargo and Citigroup have began coverage of GE Healthcare with buy rankings. Each called out the company’s range of products to support Alzheimer’s detection and treatment. BHC 5Y mountain Bausch Health 5-year performance. Bausch Health’s stock gains throughout the 12 months have not been enough for the company to depart our penalty box. And on Monday it announced its CFO resigned to pursue a chance at one other company. But on Wednesday BHC received an upgrade from investment bank Jefferies. We’re not there yet – our 4 rating on BHC stays – however it’s nevertheless a notable call. The analysts at Jefferies now rate Bausch Health stock a buy, with a price goal increase to $16 per share from $9. That may be about a double from current levels. Nevertheless, as we identified earlier, even at $16 the stock would still must greater than double again to succeed in 2021 highs of $34.38. “I’m not saying buying it. I’m simply saying we aren’t sellers for the moment,” Jim said Thursday. Jefferies expressed optimism around the company’s ability to surmount its legal challenges involving the patent for its key drug Xifaxan. With that hurdle cleared, BHC’s path to further monetize its nearly 90% stake in Bausch + Lomb (BLCO) would grow to be “more defined,” Jefferies wrote. While BHC’s divestiture of eye-care unit Bausch + Lomb has veered way off script, Jefferies sees a higher probability that Bausch Health can unlock more value from BLCO. (Jim Cramer’s Charitable Trust is long LLY, GEHC, HUM, DHR and BHC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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An worker works in an unit dedicated to the production of insulin pens at the factory of the US pharmaceutical company Eli Lilly in Fegersheim, eastern France.
Frederick Florin | AFP | Getty Images
There’s Eli Lilly (LLY), after which there’s everybody else.