A lackluster performance by the S&P 500 in the first two weeks of January could have you second-guessing adding fresh capital to stocks in 2024.
But I think that’s a mistake.
Even with the S&P chopping around to start the year, barely positive at 0.22% as I write on Friday morning…
A few lagging groups from 2023 are bucking the trend. Namely the health care sector.
If you recall, last year was a boom year for stocks with all major indexes up double digits. However, not all stocks participated.
Health care stocks underperformed massively, with the Health Care Select Sector SPDR Fund (XLV) eking out a paltry 2%.
The good news is that each new year often brings changes to the market leaderboard… And that means new superstar stocks will emerge.
Today, we’ll size up the market action year-to-date, then we’ll isolate the ONE reason Health Care stocks are poised to thrive in 2024.
After that we’ll showcase an ultra-rare outlier stock that will benefit in this latest shift.
While the Market Sputters, Health Care Stocks Buck the Trend
I shouldn’t have to tell you that betting on health care stocks is a decent idea. Last I checked, we all spend our hard-earned money on our health, no matter what the economy does.
That said, many investors didn’t get that memo last year. The group barely broke even during last year’s rally.
But oh, how things change…
Looking at the returns of all sectors year-to-date, the health care group towers above the rest with a respectable 3.28% lift:
This graphic shows a massive dichotomy going on underneath the surface of the market. Five groups are up year-to-date, while six are down.
The million-dollar question investors need to ask themselves before ever making a trade is: Why should I buy X?
In this case, X represents health care stocks. And there’s one metric that matters most to future performance: earnings growth.
If you’ve been around the market landscape for at least a handful of years, you’ve likely learned how stocks follow earnings.
Hoping to capture a future share of a company’s profits should be why you started investing in the first place. And if you think the latest thrust in medical names isn’t backed by healthy fundamentals, think again.
Health care stocks are estimated to grow their earnings by 18.2% in 2024, higher than any other sector:
You never want to fight strong earnings growth. At the end of the day, that’s what drives the long-term values of stocks.
With lower interest rates all but confirmed this year, capital-intensive business models like biopharma, instruments, and more can see margin expansion… dripping dollars to the bottom line.
When earnings are set to climb, you can bet large institutions will pounce. While many health care stocks are under accumulation right now, one name towers above all others…
One Superstar Health Care Stock to Keep on Your Radar
My career on Wall Street taught me a few things:
- First, respect market leaders — the stocks moving higher than others. There’s always a reason why.
- Second, follow institutional support by studying unusual volumes. The brightest money managers are always on the lookout for the next big trend. Volume reveals their footprints.
- Third, and most importantly, is to focus on companies with the strongest earnings growth.
If you whittle down your process to these three tenets, you’ll save yourself a lot of money and heartache. By being selective, you’ll narrow down your list of stocks, identifying contenders… and avoiding pretenders.
One company in particular hits all three.
Eli Lilly and Co. (LLY), founded in 1876, is a pharmaceutical giant that’s grown in popularity in recent years due to the success of GLP-1 weight loss drugs.
Blockbuster drugs Mounjaro and Zepbound have been getting a lot of buzz lately, however this medical behemoth has a rich history of success.
Any company still standing after nearly 150 years in business is clearly doing something right. And what Eli Lilly does right is growing profits for investors.
A case in point is the staggering income growth seen in recent years. From 2018 to 2022, Eli Lilly revenues grew an impressive 14%, from $24.5 billion to $28.5 billion.
During that climb, net income surged 90%, with $3.32 billion earned in 2018 versus $6.24 billion in 2022.
The good news doesn’t stop there. Based on FactSet’s 2024 estimates, LLY’s net income is targeted at a staggering $11.1 billion!
With rosy assumptions like this, you can bet that big institutions have been betting on the shares. And the evidence backs it up.
Back in October, I outlined the Keys To Finding Superstar Stocks. In that post, I showed how tracking unusual volume alongside outstanding fundamentals reveals the all-stars.
Using that framework, here’s the institutional footprints pressing LLY’s stock higher since 2018… the same time period of the explosion in net income.
Each blue bar indicates that LLY was attracting Big Money buying activity and had a top-notch fundamental rating:
This, folks, is what I call the stairway to heaven.
Only the best companies have a chart like this, steadily surging higher. It indicates healthy institutional demand — precisely what we want to see.
Keep this chart in hand when someone tells you the stock market’s gone nowhere the past few years. There’s a lot to be excited about under the surface.
To wrap up, I’m expecting solid gains for medical stocks in 2024. The early leaders are backed by the most important ingredient of a bull market: earnings growth.
Not to mention, another feather in the bulls’ cap is the fact that we’re in an election year. Going back to 1996, health care stocks are the best-performing sector in election season.
This backdrop means a handful of health care names, like Eli Lilly, could crush the overall indexes. Consider adding it to your portfolio and digging for more quality health care stocks just like it.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
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Source: TradeSmith