Investors looking for relief from the stock market's recent turbulence may want to consider a dose of U.S. health care stocks.
The sprawling sector – which spans everything from pharmaceutical and biotechnology firms to hospital operators and health care insurers – is "relatively well positioned for troubled economic times," said Matthew Coffina, a health care stock analyst at Chicago-based Morningstar Inc. "People can't cut back on their health care spending to the extent they can cut spending on cars and major appliances."
Amid growing concerns about the European debt crisis and faltering U.S. growth, investors have flocked to the industry, pushing up the 52-member S&P 500 Health Care Index by 11 per cent this year, far above the 5-per-cent return for the broad U.S. stock market and a 1.1-per-cent loss for its Canadian counterpart.
Despite those gains, many health care stocks are still cheap, said Vito Maida, founder of Toronto-based Patient Capital Management Inc. "The ones showing the best valuations are pharmaceutical companies and the health care insurers," he said. "They are trading on average under 10.5 times forward earnings."
The low valuations reflect investor worry that drug makers' profits will be hurt by the expiration of patent protection on several popular drugs. There is also concern that the 2010 U.S. health-reform bill will reduce profit margins for many health care providers, because of greater government involvement in the medical area.
Mr. Maida, though, believes the concerns are overblown. His HAP North American Value exchange-traded fund is 25-per-cent invested in U.S. health care stocks. He believes the sector will benefit from aging North American and European populations that will need more medical services, and from growing spending on health care by emerging nations.
"Health care is becoming more affordable, and is seen as a basic right in many parts of the world," Mr. Maida said. "And many of the pharmaceutical companies are growing in emerging markets."
Andrew Waight, a portfolio manager with Altrinsic Global Advisors LLC, says investors should be aware of the risks that go along with the sector. Health care is heavily regulated by governments that "can always change the rules of the game" as they try to reduce costs to grapple with debt burdens, Mr. Waight said, adding: "They can cut back on reimbursements [for medical services], change regulatory metrics or make it harder for drug approval."
Still, Mr. Waight says he is now more bullish on the pharmaceutical giants than he has been for the past seven years, because the impact of drugs going off patent will reach a peak in 2012, then decline.
"Drugs will still go off patent, but the sales [that will be lost] are not as great after 2012," said Mr. Waight, who runs the CI Global Health Sciences fund. "It doesn't mean that these [drug firms] are going back to being fast-growing companies, but at least that negative overhang won't be there."
Some of the best opportunities are in mid-sized firms with innovative products, Mr. Waight said. He likes names such as Gilead Sciences Inc., which develops and commercializes innovative therapies for various diseases, and Celgene Corp., which makes drug therapies for cancer and inflammatory disorders.
Also worth considering are U.S. health care insurers, also known as managed-care companies. They are stepping up acquisitions and getting involved in businesses such as health information technology.
Wendy Chua, a portfolio manager with Mackenzie Financial Corp., owns stocks such as hospital operator HCA Holdings Inc. and drug maker Shire PLC in her Mackenzie Universal Health Sciences fund.
Investors can also get wide exposure to the industry through Canadian-listed ETFs such as BMO Equal Weight Health Care and iShares S&P Global Health Care, which hedge foreign currency exposure back to Canadian dollars. U.S.-listed ETFs range from SPDR Health Care ETF to biotech plays such as SPDR S&P Biotech ETF and iShares Nasdaq Biotechnology ETF.
TOP PICKS
Vito Maida, founder of Patient Capital Management Inc.
Pfizer Inc.
The U.S. drug giant, which has been under pressure because of expiring patents on key drugs such as Lipitor, wants to spin off non-core units to enhance shareholder value, Mr. Maida said. Pfizer, which has lots of cash on its balance sheet, will likely use some of the proceeds to buy back shares. Mr. Maida considers the stock to be cheap at nine times forward earnings, with a yield of 4 per cent. His one-year target is about $28 a share.
Andrew Waight, portfolio manager with Altrinsic Global Advisors LLC
BioMarin Pharmaceutical Inc.
The U.S. specialty pharmaceutical company, which focuses on drugs to treat rare diseases, is profitable. It is expected to generate $400-million (U.S.) in revenue this year, and is spending about $200-million on research and development, Mr. Waight said. He thinks the stock could hit $40 a share in a couple of years if it reaches key milestones in its clinical trials.
Wendy Chua, portfolio manager with Mackenzie Financial
DaVita Inc.
The provider of kidney dialysis services has predictable and recurring revenues from treating diabetes in an aging population, Ms. Chua said. DaVita has cut costs to deal with reduced Medicare payouts, and she thinks the stock, which trades at 14.5 times forward earnings, could hit $100 a share in a year.
Shirley Won