US healthcare is always a political hot potato, and volatility is expected to rise as the November elections approach. But investors can find good opportunities in the sector in companies with strong long-term business drivers that are relatively immune to political noise.

Many investors are wary of US healthcare stocks during an election year. Several Democratic presidential hopefuls have proposed a single-payer insurance system (Medicare for All) to replace existing private insurance. Drug pricing is another political minefield, with both Republicans and Democrats voicing concerns about rampant healthcare cost inflation.

Healthcare stocks are already under pressure because of US election concerns. While the median return for US healthcare companies in 2019 was 27%, the sector underperformed the S&P 500 by 3.7% despite strong earnings revisions (Display).

Current valuations reflect political fears. The US healthcare sector traded at a price/forward earnings ratio of 16.1 at the end of 2019, an 11% discount to the S&P 500 (Display). That’s somewhere between the two last trough valuations, which were also driven by political concerns related to public insurance proposals by the Obama and Clinton administrations. At the same time, select healthcare companies have strong profitability and attractive growth prospects, in our view.