Summary
- Health Care stocks are outperforming the S&P 500 during the recent dip.
- Not all of the sector's components are created equally, and one Health Care Equipment & Supplies firm appears poised to test its June low.
- With a still-high valuation and poor technicals, Align is a sell.
Is Health Care coming back in vogue amid renewed stock market volatility? The Health Care Select Sector SPDR ETF ( XLV ) appears to have found relative support versus the S&P 500 Trust ETF ( SPY ). If the key level illustrated on the chart below indeed holds, active investors should consider overweighting this diverse, but often defensive, niche of the equity market. One stock, though, was once a high-flier but is now mired in a major downtrend.
Health Care Sector Relative Strength Perks Back Up
According to Bank of America Global Research, Align ( ALGN ) is the dominant company in the 'clear aligner' orthodontic market, where its Invisalign brand competes with traditional metal braces (also known as 'wires and brackets'). Align revenues come primarily from a family of clear aligner products (cases) used to treat malocclusion (crooked teeth and other dental cosmetic and medical issues), as well as some digital scanners, services, and non-case products, such as retainers and other ancillary offerings.
The Arizona-based $19.4 billion Health Care Equipment & Supplies industry company within the Health Care sector trades at a lofty 31.2 trailing 12-month price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal .
BofA analysts see a sharp earnings decline this year before a strong rebound in 2023 and continued EPS growth in 2024. The Bloomberg consensus forecast is more sanguine on ALGN's earnings outlook than BofA. In either scenario, the company's P/E ratio appears expensive given this year's negative profit growth rate vs 2021. Free cash flow is also modest and ALGN's EV/EBITDA multiple is expensive.
ALGN: Earnings, Valuation, Free Cash Flow Forecasts
Looking ahead, ALGN's Q3 earnings date is unconfirmed to take place on Wednesday, October 26, according to Wall Street Horizon. There are no other corporate events on the docket until then.
Align's Corporate Event Calendar
The Technical Take
Align was very much in favor through late 2021 as money poured into growth stocks, including those in the sometimes-defensive Health Care sector. Since the high last October, shares are down 67% after a series of steep drops earlier this year. A two-month bear market rally, which now looks like a classic bear flag pattern, topped out at the important $300 level, and the stock is now down almost 20% in just the last few weeks. The trend is clearly bearish.
I see support at the June low of $226, and it appears a test is on the way based on the price action over the last four weeks. Below that, the March 2020 bottom comes into play at $128. Traders could take a swing long with a stop under the June low, but investors should hold off given the massive and powerful downtrend.
ALGN: A Summertime Bear Flag After A Steep Drop
The Bottom Line
Align Technology still has a high valuation, though earnings growth should improve next year and in 2024, of course that growth is questionable if we enter a recession. The chart does not look any better as the trend is lower without significant support. I'd look elsewhere for Health Care exposure.
For further details see:
Align Technology: Brace For Further Downside After A Summer Rally