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 Companies reporting first-quarter earnings next week include
Bristol-Meyers Squibb Co, Boston Scientific Corp, Merck & Co, Pfizer
Inc, Gilead Sciences Inc and Celgene Corp.
So far, companies that have reported in this sector have seen
positive moves in share prices, and many investors say they think
healthcare stocks have room to run.
But options traders are not taking chances. Options on a key
healthcare exchange-traded fund (ETF) are set near their most
defensive posture ever.
So far this year, the S&P healthcare sector index has risen 8.7
percent, leading all other S&P sector indexes. Since 2008, it has
increased 179 percent while the broader S&P 500 is up 135 percent.
On Thursday, healthcare's strong performance helped push the S&P 500
to an intraday record and the Nasdaq composite index to its all-time
closing high.
Investors have been drawn to healthcare stocks by a spate of mergers
and expectations for more buyouts on top of major drug launches and
strong demand from an aging population.
"It's kind of tough to punch holes into the healthcare bull story,"
said Sven Borho, founding general partner at health specialist fund
OrbiMed Advisors LLC, in New York.
"What worries me is the long stretch of outperformance relative to
the rest of the market," he said. Even so, "it's not that healthcare
valuations broadly have gone off the roof."
The sector is trading at 18.8 times earnings estimates for the year
ahead compared to S&P's P/E ratio of 17.5.
Traders in the options market, however, are preparing for possible
downside. Activity in puts, which can be used to hedge against a
drop in shares, has picked up noticeably in April for the Health
Care Select Sector SPDR ETF.
The average daily puts volume has risen to 16,000, from 9,000 for
the first three months of 2015. For every call option, usually used
for bullish bets, there are 4.6 put options open, the highest ratio
since early 2007, right after their launch, according to options
analytics firm Trade Alert.
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"It’s really just a function of investors looking to protect their
gains," said Max Breier, senior equity derivatives trader at BMO
Capital Markets. "In a market cap-weighted ETF like the XLV, if you
get a number of the top-weighted names kind of disappointing at once
you can get a pretty violent reaction,” Breier said.
Companies reporting next week include Bristol-Meyers Squibb Co,
Boston Scientific Corp, Merck & Co, Pfizer Inc, Gilead Sciences Inc
and Celgene Corp.
Medical device maker Boston Scientific is the second-best S&P
healthcare performer with a 39-percent share price gain so far this
year. The most accurate analysts say it could meet earnings per
share estimates for 20.4 cents per share or miss by a thread,
according to StarMine.
Gilead could beat analysts' $2.30 EPS estimate by over 22 cents
while Bristol-Meyers and Celgene could beat their EPS estimates by
about a penny, according to StarMine.
Shares are more likely to react to comments about drug studies or
pricing than to results, Borho said.
Wall Street analysts expect the S&P healthcare sector to report a
10.2 percent first-quarter earnings increase, compared with 7.2
percent expected on April 1 and 12.4 percent in October, Reuters
data showed.
Other big events investors will watch next week include
first-quarter GDP numbers and the Federal Reserve's statement after
its two-day policy meeting on Wednesday. Apple Inc reports earnings
on Monday afternoon in a week when oil companies are expected to
report grim results.
(Editing by Nick Zieminski)
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