Health-Care Stocks Save the S&P 500 From Stumbling as the Dow Slumbers

Many of the S&P's best performers are drugmakers or pharmacy chains, and that might be the difference between its narrow gain and the Dow's mediocrity today.

May 5, 2014 at 12:20PM

All three of the major American stock indices have recovered quickly from fairly large opening-bell dips to trade just above breakeven at lunchtime on Monday. Most of the Dow Jones Industrial Average's (DJINDICES:^DJI) 30 components are trading slightly lower -- only eight had produced gains of greater than 0.25% shortly before noon EDT -- but roughly 225 of the broader S&P 500's (SNPINDEX:^GSPC) components are in positive territory.


Last week's divergent economic news of disappointing first-quarter gross domestic product growth but a solid uptick in employee hires left many investors unsure of what to do, and the start of this week hasn't provided much certainty yet. Weakness in China's closely watched manufacturing index and the fear of further military escalation between Russia and Ukraine have thus far been offset by a strong Institute for Supply Management report on nonmanufacturing productivity.

That gauge of service-sector production hit a new orders number of 58.2 (anything below 50 signals recession) in March, which is its strongest level this year and also slightly higher than September's 58.1 mark. The overall PMI was 55.2. It appears that the Dow's industrially focused stocks are reaping most of the rewards of the service-sector report, as Boeing, DuPont, and energy giants ExxonMobil and Chevron are four of the Dow's strongest today.

Only Disney (NYSE:DIS) is leading a charge for the Dow's numerous service-focused stocks, as its 0.9% rise puts it neck and neck with ExxonMobil's for the second-best gain of all 30 components -- only Boeing has gained over 1% so far today. Topeka Capital today upgraded the House of Mouse's shares to buy status, with a new $91 price target. The new price target gives Disney shares about 12% of further upside, which is a pretty modest expectation for a stock that has already gained over 25% in the past year. Boeing, for its part, continues to ride the positive sentiment generated by a solid sales report released on Friday. Fool aerospace and defense specialist Rich Smith has all the juicy details: in short, the airplane maker has collected 13% more orders this year than it did at the same point in 2013.


Source: Darren Hester via DeviantArt.

The Dow might be languishing, but the S&P has a very narrow edge on its smaller peer today thanks to a broad-based but not particularly powerful gain in many larger health-care stocks. The S&P's biggest gainer, shortly before noon, was Biogen Idec, but other biotech heavyweights including Gilead Sciences (NASDAQ:GILD), Alexion Pharmaceuticals, and Vertex Pharmaceuticals were among the index's leaders today. Both CVS Caremark (NYSE:CVS) and Walgreen were also among the S&P's 20 best-performing stocks so far.

Of these gainers, all but Alexion have developed a hepatitis treatment, and Gilead's market-destroying sales of apparent blockbuster (and wallet-buster) hepatitis C treatment Sovaldi has given many rivals reasons to be optimistic as well, provided they can also achieve a measure of success with their treatments. CVS reported first-quarter earnings on Friday evening, and it is clearly growing strongly for such a large and well-established retail company. For Biogen, Gilead, and pharmacy chains CVS and Walgreen, it seems likely that Obamacare's evident success in signing up more people for health insurance than it had promised has created positive momentum beyond what investors might have hoped for otherwise. Last Wednesday's GDP report supports this idea, as unprecedented growth in the health-care sector was really the only thing standing between the American economy and a mild recession in the first quarter.

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Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Chevron, CVS Caremark, Gilead Sciences, Vertex Pharmaceuticals, and Walt Disney. The Motley Fool owns shares of Gilead Sciences and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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