Michael Brush is a MarketWatch columnist. At the time of publication, I had no position in any of the securities mentioned here. Brush has suggested Seagen, Merck, BioMarin, Biogen, Bristol-Myers Squibb and Zimmer Biomet in his newsletter, Brush Up on Stocks
You are tempted to increase your exposure to stocks because of market strength. But you are still shy because of the painful sale. Also, you worry about a recession. what should you do
Buy healthcare stocks. They have a lot of defensive characteristics that help them outperform in recessions and at the end of business cycles. But they also generate a lot of growth.
“Healthcare is our primary sector amid heightened macro uncertainty,” says Bank of America strategist Savita Subramanian. “We believe the sector is well positioned amid looming recession risks.”
Here are three reasons why you should consider the healthcare sector and eight stocks and one exchange-traded fund to watch out for.
Payment of dividends
First, they are like technology, but with less risk and better dividends. Health care has posted the second-fastest revenue growth since 1986.
Technology is number one. But technology is more volatile and more vulnerable to economic slowdowns. It also has more exposure to global supply chain issues. In contrast, healthcare stocks are less likely to become unprofitable or experience a sharp decline in earnings growth. Healthcare pays bigger dividends backed by strong balance sheets and cash flow, supporting the group’s defensive characteristics. The Health Care Select Sector SPDR ETF pays a dividend yield of 1.48%.
The second reason is reliable demand growth. People are less likely to cut back on medications when their budgets are cut due to inflation. Otherwise, inflation is less of a problem for health care, since pharmaceuticals and procedures are mostly reimbursed by insurers or the government. This protects consumers from rising prices.
And more people will need medicines and medical devices. This is because there is a good demographic headwind in the aging population. The 65+ age group will grow by 50% over the next 20 years, says Bank of America. People spend more on healthcare as they age.
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Third, the industry can look forward to a better regulatory environment going forward. Betting markets are good predictors of elections. Right now, we’re being told that Republicans are likely to take control of both the House and Senate this fall. I’m apolitical, but if the players are right, it will reduce the odds of drug price control reform from Washington DC. This will remove an overhang from the industry.
Stock selection
Big Pharma: During the 2008-2010 recession and its aftermath, all healthcare sectors outperformed the S&P 500. But pharmaceuticals outperformed. This suggests that this is the health care part of overweight.
But what actions? I like to look at Baker Bros Advisors holdings for biopharma ideas as they are among the best in the field. So I’ve followed his Seagen holding since I suggested it in my February 2011 stock letter at $15. The stock is now trading at $177. But it still looks attractive.
On the one hand, it is the main holding of Baker Bros, with 38% of its portfolio. This is a remarkable portfolio concentration, indicating a high level of confidence.
Next, there is the possibility that Seagen will be bought by Merck, according to The Wall Street Journal. If not, your 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 more variations of this on the way.
Two biopharmaceutical companies to consider because they seem relatively cheap are BioMarin Pharmaceutical and Biogen. Both earn a rating of four stars (out of five) on Morningstar Direct. This tells us that the stock is trading well below its 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 diseases such as the metabolic disorder phenylketonuria. Many more therapies like these are in the pipeline, including late-stage development therapies for genetic disorders such as 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 may soon offer good news. The company should report Phase III data this fall for its Alzheimer’s therapy Lecanemab. It also has several therapies for neurological disorders in the pipeline.
For more traditional pharmaceutical names, consider Merck and Bristol-Myers Squibb. Both are selling at discounts because of concerns about patent expirations, says Bruce Kaser of stock adviser Cabot Undervalued.
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At Merck, they worry about losing patent protection for diabetes therapy Januvia next year, and cancer drug Keytruda in 2028. For Bristol-Meyers, investors are worried that patents the myeloma therapy Revlimid this year, and the cancer therapy Opdivo and the anticoagulant Eliquis in 2026.
In both cases, the fears are overblown, Kaser argues. Bristol-Myers has a strong product portfolio and is also building its product line and portfolio through acquisitions. As far as Merck is concerned, Keytruda’s 2028 patent expiration is still a long way off. And like Bristol-Meyers, it will likely use its strong balance sheet to support acquisitions.
Medtech: These are medical device companies that sell things like joint replacements, implants, pacemakers, and insulin pumps. During the recession of the Great Financial Crisis, medical technology companies continued to grow sales and earnings. In 2009, medical technology revenues and earnings grew by an average of 3.8% and 8%, according to Bank of America. In the short term, demand for their products should increase more than usual. That’s because people delayed procedures during the pandemic because of concerns about getting into hospitals. They are now doing procedures.
joint operation
One to watch out for is Zimmer Biomet. He is the great actor of joint reconstruction. It therefore benefits from the aging baby boomer population, increased obesity and the post-Covid rebound effect as many joint replacement procedures were delayed over the past two years.
Life science tools: They are the “armsmen” 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, which “suggests more predictable cash flows.”
The bench highlights Thermo Fisher Scientific. It has benefited from Covid because it offers evidence. But its scientific instruments, consumables and contract research businesses are also strong. “Organic” revenue (excluding acquisitions) grew an impressive 13% in the second quarter. Now that Covid restrictions are lifted, biopharma research will pick up again, a source of near-term growth. The company is also growing by acquisition, most recently the big December purchase of a clinical research services company called PPD for $16 billion.
Also consider Medpace Holdings due to strong insider buy signal. Chief executive 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 grew 27.7% in the second quarter.
Medpace shares have already risen sharply since the CEO’s July purchase price of $145. The stock recently sold for $169. But experts, especially founders, don’t buy short-term. And the stock still trades well below the $231 it sought in November, when the current bear and sell market began. I also favor founder-led companies because they often outperform.
This article was first published by MarketWatch, a title of the Dow Jones Group
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