Historically the health care sector performs well by remaining resilient even during hard economic times, making it a safe bet for any investment portfolio. However, 2020 has brought mixed fortunes for the sector in an environment where a pandemic shattered most sectors of the economy.
Data presented by Buy Shares indicates that five selected leading public health care companies have cumulatively lost $65.59 billion in market capitalization on a Year-to-Date basis. Among the companies, Walgreens Boots Alliance is the biggest loser at $21.21 billion. Despite the widespread losses, UnitedHealth Group’s market capitalization gained by a massive $16.73 billion.
The research also overviewed the Year-to-Date returns for the selected companies. AmerisourceBergen Corp has the biggest returns at 13.84%. Elsewhere, Walgreens Boots Alliance has the worst returns at -38.47%.
Why healthcare market cap dropped despite starting the year strong
The health care sector includes a broad range of companies that sell drugs, medical devices, insurance, alongside hospitals, and health care providers. Market capitalization refers to the total value of all the highlighted health care companies’ shares of stock. The market capitalization is key because it enables investors to understand the relative size of one company to another. The metric measures what a company is worth on the open market, as well as the market’s perception of its prospects since it shows what investors are willing to pay for its stock.
At the start of the coronavirus pandemic early this year, investors projected a boom for health care companies since the sector is vital in containing the crisis. However, months into the pandemic, it is clear that not all companies’ market capitalization and stocks responded positively.
Initially, the health care sector showed relative performance, but the industry was facing challenges. Large medical facilities and networks were among the hard hit. Most of the facilities were forced to defer elective surgeries, chronic illness treatments, orthopedics, and other services, which generate most of their revenues, to manage Covid-19 patients. At the same time, most drug companies were also hit. Most were forced to abandon any medical research and focus on answering the call of handling the virus.
Factors such as mass job losses have played a key role in the declining market cap for the companies. Job losses led to a drop in insurance-premium income. A drop in doctor visits led to reduced diagnostic tests and drug prescriptions.
The future outlook for health care companies
The health care companies are banking on a possible vaccine to make a rebound in the market. Currently, there are over 70 vaccines under development, and companies that emerge first are likely to benefit from that. For example, Johnson & Johnson’s positive change in market capitalization can be linked to the fact that the company is very active in vaccine searching. Additionally, the stock market is also depending on the vaccines to make a rebound. Positive news regarding the vaccine has seen other stocks make notable gains.
Post-coronavirus behavior will also likely spark a surge in the stock and eventually the market capitalization of most healthcare companies. During the pandemic, it emerged that most health-care systems were not prepared. It, therefore, calls for establishing strategic reserves for key medical devices and supplies like key antiviral drugs. The restocking translates to massive buying leading to a spike in stocks.
Besides banking on the coronavirus vaccines, the health care system perennially enjoys a steady stream of customers in need of its diverse products and services. The sector has seen rapid innovation that has been transforming diagnostics and robotics. Such balances will offer the sector resiliency and growth prospects, not just during the health crisis but also with the recovery path. Investors should therefore look forward to a bright future considering that the healthcare sector companies are built to stand the test of time. It is therefore important to look beyond the current crisis.
Even though the health care sector is looking at a bright future, there are some challenges along the way. The sector is highly regulated. Regulatory changes could drastically alter healthcare stock’s growth prospects. The current race to get a coronavirus vaccine is facing scrutiny from different organizations that are out to ensure it is safe for the masses. Many healthcare companies also face significant litigation risk.