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Small-Cap Healthcare ETF Outperforming in 2020: 5 Top Stocks

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The often overlooked segment, the small-cap healthcare, has been outperforming this year. This is especially true as the S&P Small Cap 600 Health Care sector has gained 5.6% so far this year, easily outpacing the broader small-cap index’s 0.8% decline and 2.1% increase of the large-cap health-care sector. As a result, Invesco S&P SmallCap Health Care ETF (PSCH - Free Report) , which tracks the small cap healthcare segment, is up 5.7%.

The outperformance can be attributed to its growth factor. This means that these are fast-growing companies that tend to have more potential than their larger peers. The growth stocks are momentum plays and tend to outperform in a trending market (a market characterized by a prolonged uptrend). These refer to high-quality stocks that are likely to witness rise in revenues and earnings at a faster rate than the industry average. These stocks harness their earnings momentum to create a positive bias in the market, resulting in rocketing share prices.  

Notably, growth stocks have beaten the value counterparts in much of the decade-long bull rally (read: Market Scales New High: Top-Ranked Growth ETFs to Buy).

Additionally, small-cap healthcare companies are benefiting from the 2020 presidential election campaign, which has put pressure on the large cap cousins on how to overhaul the industry. Progressive Democrats Bernie Sanders and Elizabeth Warren have been touting their own "Medicare for All" plans. Pete Buttigieg backs a slightly less disruptive "Medicare for All Who Want It'" proposal. Joe Biden is essentially calling for an Affordable Care Act 2.0, a revamped Obamacare. Meanwhile, President Trump is targeting high prices for prescription drugs, and wants hospitals and insurers to disclose the rates they negotiate with each other for various procedures and medical services.

Further, several encouraging trends are fueling growth in the small-cap segment of the healthcare space. These include cutting-edge medicines, new drug approvals, accelerated pace of innovation, promising drug launches, growing importance of biosimilars, cost-cutting efforts, an aging population, expanding insurance coverage, the rising middleclass, demand for new drugs, and an ever-increasing health care spending.  

Let’s take a closer look at the fundamentals of PSCH.

PSCH in Focus

This fund is home to 72 securities with each accounting for less than 5% share. Healthcare providers & services as well as healthcare equipment & supplies take the largest share at 29.2% and 26.3%, respectively, while biotechnology and pharmaceuticals round off the next two with double-digit exposure each. The product has amassed $519.7 million in its asset base and trades in a good average daily volume of around 20,000 shares. It charges 29 basis points a year from investors and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 5 Small-Cap ETFs Beating S&P 500 in 2020).

Though most of the stocks in the fund’s portfolio delivered strong returns, a few were the real stars, having gained more than 50%. Below we have highlighted those five best-performing stocks in the ETF with their respective positions in the fund’s basket:

Best Performing Stocks of PSCH

Community Health Systems Inc. (CYH - Free Report) : Shares of CYH soared about 64% so far this year. The Zacks Consensus Estimate for this year has narrowed from loss of $1.61 to loss of $1.50 over the past month, and has an estimated earnings growth rate of 15.2%. The stock currently has a Zacks Rank #1 (Strong Buy) and a VGM Score of C. It falls under a top-ranked Zacks industry (top 11%). The stock makes up for 0.6% share. You can see  the complete list of today’s Zacks #1 Rank stocks here.

Momenta Pharmaceuticals Inc. : This stock occupies the fourth position in the fund’s basket with 3.9% allocation. The Zacks Consensus Estimate for this year has narrowed from loss of $2 to loss of $1.98 over the past month with an estimated earnings growth rate of 24.9%. The stock has a Zacks Rank #3 and a VGM Score of F. It belongs to the top-ranked Zacks industry (top 27%).

Cytokinetics Incorporated (CYTK - Free Report) : This stock has gained 42.3% year to date. The Zacks Consensus Estimate for this year has narrowed from loss of $2.03 to loss of $2.02 over the past month, and has an estimated earnings growth rate of 7%. Cytokinetics has a Zacks Rank #4 (Sell) and a VGM Score of F. It belongs to a top-ranked Zacks industry (top 27%) and accounts for 0.9% of PSCH.  

Endo International plc : The stock has surged 34% so far this year and has a Zacks Rank #3. The stock has witnessed positive earnings estimate revision of 3 cents for this year over the past month. It has an expected earnings growth of 3.4%. Endo International belongs to a top-ranked Zacks industry (top 35%) and has a VGM Score of B. The stock makes up for 1.4% share in PSCH portfolio (read: Pharma ETFs Gain on Healthy Q4 Earnings).

Owens & Minor Inc. (OMI - Free Report) : This stock makes up for 0.4% of assets in PSCH. It has gained 33.3% year to date and has seen positive earnings estimate revision of a penny over the past month for this year. The company’s earnings are expected to increase 29.1% year over year. Owens & Minor also has a Zacks Rank #1 and belongs to a top-ranked Zacks industry (top 28%). It has a VGM Score of A.

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