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If you liked health-care stocks before, you’ll love them now

The sector has taken too much of a beating after a question from Congress

Bloomberg News/Landov
Downward pressure on health-care stocks is an over-reaction, according to analysts at Jefferies.
These are gloomy times in the stock market, even for the perennially hot health-care sector.

The S&P 500 Index SPX, +1.91% declined 2.6% on Monday and is down 11.8% from its all-time high May 20. It’s fallen 8.6% this year.

Judging from my inbox, we’re heading toward a bear market. Carter Worth of Cornerstone Macro — who listed four industries to play in a down market earlier this month — said as much Tuesday.

“A great number of individual stocks (and now certain major indices like the Russell 2000 and the S&P 500 Equal Weight Index) [are] making new intermediate lows, confirming their respective downtrends as real and in full force,” he said.

The health-care sector was the worst performer in August, and on Thursday we provided lists of the stocks that had declined the most and the ones trading lowest to consensus 2016 earnings estimates. Those are two ways to identify possibly candidates for a rebound.

But health care also was the worst performer in Monday’s bloodbath, declining 3.8%, after Congressional Democrats requested a subpoena for documents related to drug-price increases by Valeant Pharmaceuticals International Inc.VRX, +12.84%

That bit of news brought down the whole sector. All 55 health-care stocks in the S&P 500 declined Monday.

Of course, it’s quite a stretch for a reasonable question by the minority members of the House Committee on Oversight and Government Reform to lead to government price controls for pharmaceutical companies, and related consequences to health-care-service providers.

Jefferies analyst David Steinberg said on Tuesday that a debate over pricing “arguably will have no impact on near-term earnings,” and that it “likely will have little to no impact on future guidance” from specialty pharmaceutical companies. If Steinberg is correct, it means earnings estimates for the group fall and the current pressure on the stocks is likely to be relieved.

When discussing drug manufacturers’ price increases in a note to clients, Steinberg said: “Headline risk can weigh on [specialty] pharma shares for some time.” So there you have it: This is a trend the analyst thinks could last “possibly through next year’s presidential election.”

That being said, according to a detailed analysis, the “vast majority” of large-cap specialty drug makers tracked by Jefferies “have taken average annual price increases between 7%-20% over the past three years,” he said. Those may seem like large price increases, but Valeant has increased prices for recently acquired brands by up to 800%, according to Jefferies.