Why Health Care Is Embarrassing the Dow

With everyone's attention focused on major macroeconomic shocks, important trends from the last six months have largely gone unnoticed. So instead of rehashing how Italy's increasing borrowing costs continue to jeopardize the euro's long-term viability, let's talk health care, because it's stomping the markets in 2012.

Over the last six months, the health-care sector has returned a whopping 29.6%, nearly 10 times better than the Dow Jones' (INDEX: ^DJI) 3.3% gain. The next closest sectors, financials and technology, have only returned a little more than half of health care's gains. Excitement over new drug treatments and merger/acquisition activity has supplanted the long-term pessimism over patent expirations and government reforms. The industry may not keep this breakneck pace up, but its relative outperformance should continue into the foreseeable future.

Let's take a closer look at how the three major indexes are faring.

Source: Yahoo! Finance.

Don't let the flatness fool you; all three indexes were down significantly at the beginning of the day. Unsurprisingly, the markets' "fear index" has seen a spike; the VIX (INDEX: ^VIX) is up 5% today. Slightly more than half of the Dow's 30 components have gains on the day, with JPMorgan Chase the biggest winner. CEO Jamie Dimon testified in front of Congress this morning regarding the $2 billion trading loss. Despite nothing happening that would affect the stock, shares are up 3.5%.

The largest Dow component, Johnson & Johnson (NYS: JNJ) , is putting up a solid 1.5% gain as Wall Street analysts are falling all over themselves to upgrade the stock. JPMorgan, Jefferies, and Raymond James all put buy recs on the stock after management re-engineered the near-$20-billion purchase of Synthes to use equity purchased through stock buybacks to fund the deal (instead of a dilutive offering).

J&J also received excellent results from diabetes treatment canagliflozin, as it beat the current standard of care, Merck's Januvia. Diabetes, a growing problem in this country, is gaining additional attention from big pharma. Amylin (NAS: AMLN) has found itself in the midst of a bidding war for its new once-weekly drug Bydureon, and Merck is rumored to be one of the interested parties. Two drugs for treating obesity, which is linked to type 2 diabetes, are up for FDA approval soon, with Arena Pharmaceutical's (NAS: ARNA) lorcaserin in the hot seat in June. Shares are up over 400% in the last 12 months, but investors hoping for a buyout upon approval may have to wait until lorcaserin proves itself in the marketplace first.

Arena has gone on an incredible run, but there are other game-changing revolutions happening at the cutting edge of health care. Motley Fool Co-Founder David Gardner has uncovered a small company with the ability to radically improve how a common and growing procedure is performed. We invite you to download The Motley Fool's special report, "Discover the Next Rule-Breaking Multibagger." It's free for a limited time only. Click here to get a leg up on Wall Street.

At the time thisarticle was published David Williamsonowns shares of Johnson & Johnson, but holds no positions in any other companies mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of JPMorgan Chase and Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson.Motley Fool newsletter serviceshave also recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has adisclosure policy.
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