You are tempted to increase your exposure to stocks because of the firmness of the market. But you still shy away from gunning because of the painful sell-off. Also, you are worried about the recession.
What to do? Buy health care stocks.
They have a lot of defensive characteristics that help them outperform recessions and late in economic cycles. But they also generate a lot of growth.
“Health care is our top sector in the midst of increased macro-uncertainty,” says Savita Subramaniam, Bank of America strategist. “We believe the sector is well positioned amid the risk of an impending recession.”
Here are three reasons to own the health care sector, and eight stocks and an exchange-traded fund (ETF) you should consider.
1. They are like technology, but with less risk and better dividends
Health care recorded the second fastest income growth since 1986. Tech number 1. But the technology is more volatile and more vulnerable to economic downturns. Tech also has greater exposure to global supply chain issues. Conversely, health care stocks are less likely to become unprofitable, or decline after a sharp drop in earnings. Health care pays large dividends, backed by a solid balance sheet and cash flow, supporting the group’s defensive characteristics. Health Care Select Sector SPDR XLV,
The exchange traded fund pays a 1.48% dividend yield.
2. Reliable demand growth
People are less likely to cut back on meds when their budget is tight due to inflation. Otherwise, inflation is not an issue for health care because pharmaceuticals and procedures are mostly reimbursed by the insurer or the government. It protects the consumers from rising prices. And more people will need drugs and medical equipment. This is because the aging population has a good demographic tailwind. Bank of America says the age group over 65 will increase by 50% over the next 20 years. As people age, people spend more on health care.
3. A Better Regulatory Environment Ahead
Betting markets are good predictors of elections. Right now they’re telling us Republicans could take control of both the House and Senate this fall. I’m apolitical, but if the gamblers are right, this would lower the odds of drug-price-control reform from Washington, DC. This would remove an overhang from the industry.
big pharma: During the 2008-2010 recession and beyond, all health care sectors outperformed the S&P 500 SPX,
But pharma outperformed. This suggests that it is part of health care for the overweight.
But what stock? I like to look at Baker Brothers Advisors’ holdings for biopharma ideas, as they are among the best in the area. So I’ve followed his holding season SGEN,
Since I recommended it in my stock letter (link is in my bio, below) in February 2011 at $15. The stock now trades for $177. But it still looks attractive.
For one thing, it’s Baker Brothers.’ Top holding, 38% of their portfolio. This is remarkable portfolio concentration, indicating a high degree of confidence. Thereafter, there is a chance that Cezanne may be bought by Merck MRK,
According to the Wall Street Journal. Otherwise his business is fine. Cizen has a portfolio of antibody-drug conjugates that allow cancer drugs to target tumors by improving their potency and safety, with more variations on the way.
Two biopharma companies to consider because they appear to be relatively cheap BioMarin Pharmaceutical BMRN,
and Biogen BIIB,
Both get a four-star rating (out of five) on Morningstar Direct. This tells us that stocks trade well below their fair value as calculated by Morningstar Direct.
BioMarin has a portfolio of treatments for rare genetic diseases such as mucopolysaccharideosis, a deficiency of the enzymes needed to process sugars, which afflicts one in every 25,000 people born. But BioMarin’s treatments also treat more common diseases such as phenylketonuria, a metabolic disorder. Many more such treatments have piled up in the pipeline, including late-stage developmental treatments for genetic disorders such as dwarfism and hemophilia.
Biogen’s second-quarter sales fell 5% due to general competition for blockbusters like Techfidera for Multiple Sclerosis. But Biogen’s pipeline may soon deliver good news. The company should report Phase III data this fall for its Alzheimer’s therapy, lecanumab. It also has several treatments for neurological disorders along the way.
For more traditional pharma names, consider Bristol-Myers Squibb BMY,
and Merck. Both are selling at a discount because of patent expiration concerns, says Bruce Kaiser of Cabot Undervalued Stocks Advisor.
For Bristol-Meyers, investors are worried about patents starting this year for the myeloma therapy Revlimid, and the cancer therapy Opdivo and the blood thinner Eliquis in 2026. At Merck, they are concerned about the loss of patent protection for the diabetes medicine Januvia. Next year, and cancer drug Keytruda in 2028.
Saffron argues that apprehensions are strong in both cases. Bristol-Myers has a strong product pipeline and is also building out its product line and pipeline through acquisitions. For Merck, the 2028 Keytruda patent expiration is still a long way off. And like Bristol-Meyers, it’s likely to use its strong balance sheet to support the acquisition.
medtech: These are medical-device companies that sell things like joint replacements, implants, pacemakers, and insulin pumps. During the Great Financial Crisis recession, medtech companies continued to grow sales and earnings. Bank of America says that in 2009, MedTech revenue and earnings grew by an average of 3.8% and 8%.
In the near future, the demand for their products should increase more than usual. This is because people have delayed procedures during the pandemic due to concerns about going to hospitals. Now they are getting the procedures done.
Zimmer Biomet ZBH is one to consider,
This joint is a big player in rebuilding. It therefore benefits from an aging baby boomer population, rising obesity and the post-Covid impact as many joint replacement procedures were delayed over the past two years.
life science equipment: These are “weapons dealers” of biopharma companies and universities in drug-development research. Bank of America says they offer some protection because about 75% of their sales come from recurring revenue. “This suggests a more predictable cash flow,” says the bank.
Bank of America singles out Thermo Fisher Scientific TMO,
It has benefited from Covid because of the testing it provides. But its scientific equipment, consumables and contract-research businesses are strong, too. “Organic” revenue (excluding acquisitions) grew an impressive 13% in the second quarter. Now that the COVID restrictions have been lifted, biopharma research will resume, a source of growth in the near term. The company is also growing from acquisitions, most recently the large December purchase of a clinical-research-services company called PPD for $16 billion.
Also consider Medpace Holdings MEDP,
Due to strong insider buy signal. CEO and founder August Troendel bought $4.4 million of stock in July, although he already owned more than six million shares. Like Thermo Fisher Scientific, MedSpace provides clinical-research-services to biotech companies, especially smaller ones. But MedSpace is growing very fast. Sales grew 27.7% in the second quarter.
Medpace stock has already gone well above the CEO’s July purchase price of $145. The stock recently sold for $169. But insiders, especially founders, don’t buy for the short term. And the stock still trades well below the $231 it went into November when the current sell-off and bear market began. I also support founder-run companies because they often outperform.
Michael Brush is a columnist for MarketWatch. At the time of publication, he did not hold any position in any of the stocks mentioned in this column. Brush recommends SGEN, MRK, BMRN, BIIB, BMY and ZBH in its stock newsletter, brush up on stock, Follow him on Twitter @mbrushstocks.