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There’s no more easy money in health-care stocks

Another sector is poised to outperform in the months ahead

Bloomberg News/Landov
The health-care sector has been one of the most consistent performers over the past 10 years, and the long-term prognosis is still good, but the road will be rockier.

By most measures, health care has been the best-performing sector in the U.S. stock market for some time.

Until it peaked in July, the Health Care Select XLV, +1.60% outpaced all its sector rivals, racking up gains of nearly 150% over the previous five years and 42% since November 2013, when this column called health care “the best stock sector for your money.”

Since July 20, however, only the blighted energy and materials sectors, both in secular bear markets, have done worse.

I expect health care to be a winner in coming years, but I don’t think it can remain the market’s leader, because I doubt that biotechnology stocks, the sector’s principal growth engine this decade, can get all of their mojo back.

The biotechs were pummeled after Democratic presidential candidate Hillary Clinton tweeted about “outrageous” price gouging in the industry when Martin Shkreli, the tone-deaf 32-year-old former hedge fund manager and CEO of Turing Pharmaceuticals, hiked the price of a 62-year-old drug from $13.50 to $750 a pill.

Suddenly, the blood of “political risk” was in the industry’s waters and it was the same shark who had wreaked havoc on health-care stocks with Hillarycare back in the 1990s.

The iShares Nasdaq Biotechnology ETF IBB, +1.95% the largest biotech ETF, tumbled 27%, and has bounced back only a bit, widely underperforming the benchmark S&P 500 Index and the Nasdaq Composite during the current market correction.

ETFTicker11/15/2013 - 7/20/20157/20/2015 - 10/5/20153 years5 years5 years through July 20, 2015
Health Care Select SPDRXLV,+1.60%42%-12%66%120%148%
Nasdaq Biotechnology ETFIBB,+1.95%87%-21%114%251%347%
Consumer Disc. Select Sector SPDRXLY,+0.34%22%-4%59%122%128%
Technology Select Sector SPDRXLK,+0.46% 27%-8%30%70%81%
Consumer Staples Select Sector SPDRXLP,+0.91% 16%-5%31%70%75%
S&P 500 IndexSPX,+0.80%18%-8%34%69%81%

I think the sell-off was a huge overreaction, but it did great damage to biotech stocks and people who owned them.

Managers of two leading health-care funds I mentioned in that 2013 column remain bullish on health care, but had conflicting opinions about biotech.

Ethan Lovell, assistant portfolio manager of Janus Global Life SciencesJNGLX, +1.06% says the fund has “a fairly significant position in biotech,” which has “the best industry pipeline I’ve [ever] seen.”

“Biotechnology has been tremendously productive over the last five years,” he told me, citing a “tremendous volume of new products,” including an “above-average percentage of positive late-stage outcomes” in clinical trials.

Eddie Yoon, who runs the Fidelity Select Health Care Portfolio FSPHX, +0.80%called biotech’s fundamentals “incredibly strong,” but has reduced his fund’s weighting in the group to less than 20% of its holdings. He said he’s very selective in buying biotech now.

“The risk of being wrong is much higher than it was three to four years ago,” he told me.