Opinion: There are three reasons why healthcare is the best sector in the market today. These eight actions are the most carefree.
You are tempted to increase your equity exposure due to the strength of the market. But you are still shy because of the painful sale. Moreover, you fear a recession.
What to do? Buy healthcare stocks.
They have many defensive characteristics that help them outperform during recessions and at the end of economic cycles. But they also generate a lot of growth.
“Healthcare is our largest sector amid heightened macroeconomic uncertainty,” said Savita Subramanian, strategist at Bank of America. “We believe the sector is well positioned for the looming risks of recession.”
Here are three reasons why you should own the healthcare sector, and eight stocks and an exchange-traded fund (ETF) to consider.
1. They’re like technology, but with less risk and better dividends
Health care posted the second-fastest earnings growth since 1986. Technology is No. 1. But technology is more volatile and more vulnerable to economic downturns. The technology is also more exposed to global supply chain issues. By contrast, healthcare stocks are less likely to become unprofitable or post a sharp decline in earnings growth. Healthcare pays out larger dividends supported by strong balance sheets and cash flow, supporting the group’s defensive characteristics. The SPDR XLV healthcare sector,
The listed index fund pays a dividend yield of 1.48%.
2. Reliable demand growth
People are less likely to reduce their drug use when their budget is tight due to inflation. Otherwise, inflation is less of a problem for health care since pharmaceuticals and procedures are primarily reimbursed by insurers or the government. This protects consumers from rising prices. And more and more people will need medicines and medical devices. This is because there is a demographic tailwind in the aging population. The over-65 age group will grow by 50% over the next 20 years, according to Bank of America. People spend more on health care as they get older, of course.
3. A better regulatory environment ahead
Betting markets are good predictors of elections. Right now, they’re telling us that Republicans will likely take control of the House and Senate this fall. I’m apolitical, but if the players are right, it will reduce the chances of drug price control reform from Washington, DC. This will remove an industry overhang.
Big Pharmacy: During the 2008-2010 recession and its aftermath, all healthcare sectors outperformed the S&P 500 SPX,
But pharma outperformed the most. This suggests that it is part of health care to be overweight.
But what action? I love looking at Baker Bros. holdings. Advisors for biopharmaceutical ideas, because they are among the best in the field. So I followed their holding company Seagen SGEN,
since I suggested it in my stock letter (link is in my bio, below) in February 2011 at $15. The stock is now trading at $177. But he still looks attractive.
On the one hand, it’s the Baker Bros. first position, at 38% of their portfolio. This is a remarkable portfolio concentration, which signals a high level of confidence. Then there is a chance that Seagen will be acquired by Merck MRK,
according to the Wall Street Journal. Otherwise, his business is fine. Seagen has a portfolio of antibody-drug conjugates that improve the potency and safety of cancer drugs by targeting them to tumors, with other variants on the way.
Two biopharmaceutical companies to consider because they seem relatively cheap are BioMarin Pharmaceutical BMRN,
and Biogen BIIB,
They both get a four star rating (out of five) from Morningstar Direct. This tells us that the stocks are trading well below their fair value, as calculated by Morningstar Direct.
BioMarin has a portfolio of therapies for rare genetic conditions such as mucopolysaccharidosis, a lack of enzymes needed to process sugars, which affects approximately one in 25,000 people. But BioMarin’s therapies also treat more common conditions like phenylketonuria , a metabolic disorder. Many more therapies like these are in the pipeline, including late-stage developmental therapies for genetic disorders like dwarfism and hemophilia.
Biogen’s second-quarter sales fell 5% due to generic competition for blockbusters like its Tecfidera for multiple sclerosis. But Biogen’s pipeline could soon deliver some good news. The company is expected to release phase III data this fall for its Alzheimer’s treatment, Lecanemab. He also offers several therapies for neurological disorders along the way.
For more traditional pharmaceutical names, consider Bristol-Myers Squibb BMY,
and Merck. Both are selling at a discount due to patent expiration concerns, says Bruce Kaser of the Cabot Undervalued Stocks Advisor.
For Bristol-Meyers, investors are worried about filing patents for myeloma treatment Revlimid this year, and for cancer treatment Opdivo and blood thinner Eliquis in 2026. At Merck, they are worried about losing the patent protection for the diabetes treatment Januvia next year, and the cancer drug Keytruda in 2028.
Either way, the fears are exaggerated, argues Kaser. Bristol-Myers has a robust product pipeline and is also growing its product line and pipeline through acquisitions. As for Merck, the expiration of the Keytruda patent in 2028 is still a long way off. And like Bristol-Meyers, it will likely use its strong balance sheet to support acquisitions.
medical technology: These are medical device companies that sell products such as joint prostheses, implants, pacemakers and insulin pumps. During the recession of the Great Financial Crisis, medical technology companies continued to increase sales and profits. In 2009, medical technology revenues and profits grew 3.8% and 8% on average, according to Bank of America.
In the short term, demand for their products is expected to increase more than usual. This is because people have delayed procedures during the pandemic due to fears of going to hospitals. Now they do procedures.
One to consider is Zimmer Biomet ZBH,
It is the big player in joint reconstruction. It therefore benefits from the aging of the baby-boomer population, the rise in obesity and the post-Covid rebound effect since many joint replacement procedures have been delayed over the past two years.
Life Science Tools: They are the “arms dealers” of biopharmaceutical companies and universities in drug development research. They offer some security because about 75% of their sales come from recurring revenue, says Bank of America. “This suggests more predictable cash flows,” the bank explains.
Bank of America recognizes Thermo Fisher Scientific TMO,
It has benefited from the Covid because it offers tests. But its scientific instruments, consumables and contract research businesses are also strong. “Organic” revenue (excluding acquisitions) grew by an impressive 13% in the second quarter. Now that the Covid restrictions are lifted, biopharmaceutical research will resume, a source of near-term growth. The company is also growing through acquisition, most recently the big $16 billion purchase of a clinical research services company called PPD.
Also consider Medpace Holdings MEDP,
due to the strong insider buy signal. CEO and founder August Troendle bought $4.4 million worth of stock in July, even though he already owned more than six million shares. Like Thermo Fisher Scientific, Medpace provides clinical research services to biotech companies, especially smaller ones. But Medpace is growing much faster. Sales rose 27.7% in the second quarter.
Medpace shares have already risen significantly from the CEO’s $145 purchase price in July. The stock recently sold for $169. But insiders, especially founders, don’t buy in the short term. And the stock is still trading well below the $231 it had in November when the current sell-off and bear market began. I also favor founder-led companies because they often outperform.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no position in the stocks mentioned in this column. Brush suggested SGEN, MRK, BMRN, BIIB, BMY and ZBH in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.