22May12:48 pmEST
A Sector Full of Sinners
A value trap is a stock or other investment that appears attractively priced because it has been trading at low valuation metrics, such as price to earnings (P/E), price to cash flow (P/CF), or price to book value (P/B) for an extended period.
A value trap persuades investors because the trade appears inexpensive relative to historical valuation multiples of the stock, industry peers, or the prevailing market multiple. A value trap can drop further after an investor buys into the company.
Healthcare stocks in the XLV ETF are threatening to roll back over today despite a broad market trying to bounce, as seen on the first daily chart, below.
For a while now in 2025 healthcare names have been out of favor due to a variety of reasons. Naturally, with the way this market has been going for years, we have a plethora of eager dip-buyers who see a golden opportunity to cash in at seemingly low prices in the space.
First and foremost, observe the multi-decade quarterly chart, second below, of this same XLV ETF. A little perspective is in order, as healthcare names absolutely participated in the global liquidity bubble we saw in financial assets since the March 2009 bear market bottom.
Putting to one side the karma of pill-pushing companies in the space, which may or may not be helpful or hurtful to consumers (not to mention questionable tactics with physicians and hospitals), there remains the issue of whether the sector is even investable given the stance President Trump and his Administration have taken so far on some healthcare-related issues like pricing.
In addition, the notion of the sector at-large being one big value trap, as defined above, is very much in play when you, again, consider the quarterly chart and the room to drop on a long-term basis.
As an example, Intuitive Surgical (ISRG) one of the largest market cap names in the XLV, trades at a forward PE of 60 and is one of the steepest uptrends on a long-term basis you will see in the entire market. That is not exactly the stuff out of which generational bottoms are made. While ISRG is more of a growth name than, say, JNJ or MRK, once again the regulatory and even litigation risks seem higher than usual alongside the tightening of global liquidity.
All of which is to say the juice does not yet seem worth the squeeze in healthcare.
