By Ben Levisohn

Healthcare stocks have been performing so badly for so long, it's hard to tell whether they need a doctor or a mortician. They may finally be on the verge of a revival.

Down 5.1% so far this year, the Health Care Select Sector SPDR exchange-traded fund has been running neck and neck with energy and consumer discretionary for the worst sector of 2025. The S&P 500, for its part, is down just 0.3%. It's not hard to see why. The sector has been hurt by Donald Trump's decision to name Robert F. Kennedy Jr. -- no fan of traditional science-based medicine -- to head Health and Human Services and Marty Makary -- more a devotee of science but no less a skeptic of the pharmaceutical industry -- to head the Food and Drug Administration; by the collapse of UnitedHealth Group stock, once the sector's largest, under the sheer weight of bad business decisions and scandals; and continued scrutiny of Medicare and drug pricing, among other initiatives.

Healthcare's bad run isn't just a 2025 phenomenon. The Health Care Select Sector SPDR has underperformed the SPDR S&P 500 ETF by 9.1 percentage points annualized over the past five years and fallen short of the benchmark in four of the past five calendar years. Clearly, more than Trump is weighing on the sector. Regulatory uncertainty, pandemic-related disruptions, and lack of innovation outside of fat-burning GLP-1s have contributed to the view that the sector is anything but a must-own.

Sometimes, though, these sentiment shifts get too extreme -- and now may be one of those moments. One way market technicians try to compare indexes is by looking at the change in the ratio of one to the other. Jason Goepfert, founder and senior research analyst at SentimenTrader, notes that the ratio of the price of the healthcare index relative to the S&P 500 fell more than 35% from its most recent high, something that had only occurred seven times before over the past 100 years. That type of relative decline has typically been a good time to buy the sector, which has averaged a return of 17% over the subsequent 12 months.

But wait, there's more. The Health Care ETF traded at a new 52-week low on May 15 before rallying to finish the day above the previous day's high. That, too, is a rare occurrence -- it's happened just four other times since the ETF's inception in 2000. Once again, returns have been quite good. The ETF has averaged a 21% rise over the 12 months following the signal, according to SentimenTrader data, including a 46% rise after getting triggered in 2009. That, too, suggests the sector is oversold and primed for a rally. "Trends in the sector are so bad that they indicate washout conditions, and investors seem to sense snapback potential," Goepfert writes.

Insiders, however, are taking the long view. Goepfert notes that they've been scooping up shares of beaten-up UnitedHealth and Humana, among others, with the buying outpacing selling. That, too, has been a good sign for returns. "The increasing pace of buying among insiders in the sector further confirms that those who should know best have confidence in a potential recovery," he writes.

Not everyone is convinced. Earlier this month, Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities, noted that the sector had become increasingly tied to the market environment, with about 70% of the price returns over the past five years explained by macro forces. The sector has also gotten riskier, with earnings-per-share volatility now close to the same as the overall market's, margins that have been shrinking, and debt that has been rising.

The only thing it really has going for it is valuation -- biotech stocks are cheaper than growth peers in the tech sector, and pharmaceutical stocks trade at a discount to defensive consumer staples. While the group ranks No. 2 in BofA's short-term sector model, it remains an underweight in its S&P 500 weightings.

Still, Subramanian highlighted six healthcare stocks that could be worth a look: drug distributor Cardinal Health, CVS Health, Eli Lilly, health insurer Cigna Group, Danaher, and Thermo Fisher Scientific.

Those seem like decent choices, but we'd highlight one of our own: Gilead Sciences.

Gilead has been stuck in no-man's-land since it came up with a cure for hepatitis C, which was approved in 2013. But a controversy over cost and almost immediate competition from AbbVie and others caused the stock to peak in 2015. It's been range-bound ever since. Gilead, however, is now near the top of its range, and tantalizingly close to a breakout. The next catalyst could be its HIV treatment lenacapavir, which is awaiting FDA approval. It's injected twice a year, rather than being a pill taken every day, which Jefferies analyst Michael Yee says could be attractive to current patients.

A decision should come by June 19, though there are worries that the approval will get held up. Yee doesn't think it will. "[Management] has been in good dialogue [with the] FDA and we're weeks away and the drug has Breakthrough Therapy designation," he explains. "We see a [potential] strong launch into 2026 and numbers going up." His price target of $130 -- 14 times 2026 earnings of $9 a share -- suggests shares could gain 22% from a recent $106.51.

That'll put a spring in your step.

Write to Ben Levisohn at ben.levisohn@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 23, 2025 09:57 ET (13:57 GMT)

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