Health care investors in 2016 will need to be more selective about specific stocks, following an "unprecedented five-year bout of outperformance," according to a Goldman Sachs.
The Health Care Select Sector SPDR fund is up 3% this year versus the S&P 500 Index, which is down 2%. Health care is the third best S&P sector year to date, Goldman says. On the one hand, five companies of the sector's 10 best performers this year were "product cycle/pipeline stories, an investable theme that we think will be increasingly important for the forward outlook, irrespective of the direction of the overall [health care] tape," said a note to clients on Thursday.
But looking toward 2016, Goldman expects a "confluence" of macro themes (election year, rising rates and the sector's relative growth trajectory) as well as the increasing scrutiny over drug pricing, slowing M&A and uncertainty over the Affordable Care Act to "shift the sands beneath the bull case."
"The net effect of these moving parts create a tougher backdrop for further sector level outperformance, in our view, and an environment in which stock selection will become ever more important," the Goldman note said. "With this outlook piece, we make several changes that now reflect a more neutral view" on health care stocks.
Still there are specific companies that are attractive, according to Goldman. Below are the nine health care stocks on Goldman's Conviction Buy list, paired with ratings from TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equity market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014, beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Here's the list and when you're done check out the A-rated stocks with high total returns to buy for 2016.