You are tempted to increase your exposure to stocks due to the strength of the market. But you are still shy for the gun due to the painful selloff. Also, you are worried about a recession.
What to do? Buy health shares.
They have many defensive characteristics that help them outperform in recessions and past economic cycles. But they also generate a lot of growth.
“Healthcare is our flagship sector amid heightened macroeconomic uncertainty,” said Savita Subramanian, Bank of America strategist. “We believe the sector is well positioned amid looming recession risks.”
Here are three reasons why you should own the healthcare sector and eight stocks and an exchange traded fund (ETF) to consider.
1. They are like technology, but with less risk and better dividends
Healthcare has seen the second fastest earnings growth since 1986. Technology is number 1. But technology is more volatile and more vulnerable to economic downturns. The technology also has greater exposure to global supply chain problems. Conversely, healthcare stocks are less likely to become unprofitable or experience a sharp decline in earnings growth. Healthcare distributes higher dividends backed by solid balance sheets and cash flows, in support of the group’s defensive characteristics. The health sector selected SPDR XLV,
exchange traded fund pays a 1.48% dividend yield.
2. Reliable growth in demand
People are less likely to cut their medicines when their budgets shrink due to inflation. If not, inflation is less of a concern for healthcare as pharmaceuticals and procedures are mostly reimbursed by insurers or the government. This protects consumers from rising prices. And more and more people will need drugs and medical devices. This is because there is a nice demographic wind in the aging population. The 65+ age group will grow by 50% over the next 20 years, Bank of America says. People spend more on health care as they get older, of course.
3. A better regulatory environment in sight
The betting markets are good predictors of elections. Right now they are telling us that Republicans are likely to take control of both the House and the Senate this fall. I’m apolitical, but if the players are right, the chances of a drug price control reform from Washington, DC will be reduced.
Great pharmacy: During the 2008-2010 recession and its aftermath, all healthcare sectors outperformed the S&P 500 SPX,
But the pharmaceutical sector outperformed the most. This suggests that this is the overweight part of health care.
But what actions? I love looking at Baker Bros. Advisors holdings for biopharmaceutical ideas, as they are some of the best in the business. So I followed their company Seagen SGEN,
since I suggested it in my backup letter (link is in my bio, below) in February 2011 at $ 15. The stock is now trading at $ 177. But it still looks attractive.
First, it’s the Baker Bros. ‘ top holding, 38% of its portfolio. This is a significant concentration of the portfolio, which signals a high level of confidence. Subsequently, there is a possibility that Seagen will be taken over by Merck MRK,
according to the Wall Street Journal. If not, his business is fine. Seagen has a portfolio of antibody-drug conjugates that improve the potency and safety of anticancer drugs by targeting them to cancers, with more variations on the way.
Two biopharmaceutical companies to consider because they seem relatively cheap are BioMarin Pharmaceutical BMRN,
and Biogen BIIB,
Both get a four-star (out of five) rating from Morningstar Direct. This tells us that the shares are trading well below their fair value as calculated by Morningstar Direct.
BioMarin has a portfolio of therapies for rare genetic diseases such as mucopolysaccharidosis, a lack of enzymes needed to process sugars, which affects approximately one in 25,000 people born. But BioMarin’s therapies also treat more common ailments such as phenylketonuria, a metabolic disorder. Many other therapies like these are in the pipeline, including late-stage developmental therapies for genetic diseases such as dwarfism and hemophilia.
Biogen’s second-quarter sales fell 5% due to competition from generics for blockbusters like Tecfidera for multiple sclerosis. But Biogen’s pipeline may soon be delivering good news. The company is expected to report Phase III data this fall for its Alzheimer’s therapy Lecanemab. He also has several therapies for neurological disorders on the way.
For more traditional pharmaceutical names, consider Bristol-Myers Squibb BMY,
and Merck. Both are selling at discounted prices due to patent expiration concerns, says Bruce Kaser of Cabot Undervalued Stocks Advisor.
For Bristol-Meyers, investors are concerned about patents launched this year for Revlimid myeloma therapy and Opdivo cancer therapy and Eliquis blood thinner in 2026. At Merck, they are concerned about the loss of patent protection. for diabetes therapy Januvia next year and the cancer drug Keytruda in 2028.
In both cases, the fears are exaggerated, Kaser argues. Bristol-Myers has a strong product pipeline and is also building its product line and pipeline through acquisitions. As for Merck, the expiry of the Keytruda 2028 patent is still a long way off. And like Bristol-Meyers, it will likely use its solid balance sheet to support acquisitions.
medical technologyThese are medical device companies that sell items such as joint replacements, 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 revenue and earnings grew an average of 3.8% and 8%, Bank of America says.
In the short term, the demand for their products is expected to increase more than usual. This is because people delayed procedures during the pandemic due to concerns about going to hospitals. Now they are completing the procedures.
One to consider is Zimmer Biomet ZBH,
He is the great actor in joint reconstruction. So it benefits from the aging baby boom population, increased obesity and post-Covid rebound effect as many joint replacement procedures have been delayed over the past couple of years.
Life science tools: These 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, Bank of America says. “This suggests more predictable cash flows,” the bank says.
Bank of America identifies Thermo Fisher Scientific TMO,
It benefited from Covid because it offers tests. But its scientific instruments, consumables, and contract research activities are also strong. “Organic” revenue (excluding acquisitions) grew an impressive 13% in the second quarter. Now that Covid restrictions have been lifted, biopharmaceutical research will resume, a source of near-term growth. The company is also growing thanks to the acquisition, most recently the large December purchase of a clinical research services company called PPD for $ 16 billion.
Also consider Medpace Holdings MEDP,
due to the strong preferred buy signal. CEO and founder August Troendle bought $ 4.4 million worth of shares in July even though he already owned over six million shares. Like Thermo Fisher Scientific, Medpace offers clinical research services to biotech companies, especially smaller ones. But Medspace is growing much faster. Sales grew 27.7% in the second quarter.
Medpace shares have already risen a lot from the CEO’s July purchase price of $ 145. The stock recently sold for $ 169. But insiders, especially the founders, aren’t buying in the short term. And the stock is still trading well below $ 231 in November when the current sell-off and bear market began. I also prefer founder-managed companies because they often outperform.
Michael Brush is a MarketWatch columnist. At the time of publication, he had no positions in any of the titles mentioned in this column. Brush suggested SGEN, MRK, BMRN, BIIB, BMY, and ZBH in its stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.