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September and October are historically bad months for the stock markets, but U.S. health care equities can be a prescription to help soothe stomach-churning volatility.
Health care is a defensive sector because its companies are involved in goods or services that are usually a necessity. It doesn’t mean that their stocks won’t fall, but they can get hurt less in market downturns.
Still, not all health care stocks are alike. Those of biotechnology firms can be volatile because their returns typically depend on approvals by the U.S. Food and Drug Administration or other regulators.
Government policies can also affect this industry. The U.S. government recently named the first 10 drugs for which it wants price cuts starting in 2026, but drug companies are fighting this move in court.
Given the complexities of this industry, Globe Advisor asked three portfolio managers for their top picks among defensive health care stocks.
Greg Quickmire, portfolio manager and research lead for health care equities, CI Global Asset Management
The fund: CI Global Health Science Corporate Class
The pick: McKesson Corp. MCK-N
This U.S. pharmaceutical distribution giant is a defensive stock play because it benefits from an aging population and consumers buying drugs regardless of economic recessions, Mr. Quickmire says. The Irving, Tex.-based company – one of three major players in this space – earns revenue by buying drugs at a slight discount and selling them to pharmacies.
But McKesson, the leader in oncology distribution, will benefit from next-generation, cancer drugs that come with higher profits in addition to the traditionally more sizeable margins on generic versus branded drugs, he adds.
In bear markets with at least a 15-per-cent drawdown over the past 30 years, McKesson’s stock only underperformed the broad market in 2018 and by 0.5 per cent, Mr. Quickmire notes. The stock is now “fairly valued.” A risk is the U.S. government reducing prices of certain drugs. Yet, that’s unlikely in the near term, he adds.
The pick: Humana Inc. HUM-N
This U.S. health insurer, which focuses on offering the Medical Advantage program that caters to seniors, benefits from aging baby boomers, Mr. Quickmire says. Private insurers are paid a set rate by the U.S. government to manage member health care. The Louisville, Ky.-based company is the second-largest player in this space after UnitedHealth Group Inc.
A key for Humana is membership growth, and the peak year for most baby boomers turning 65 will be in 2025, he says. Seniors usually switch from a government Medicare plan to the Medicare Advantage program with more benefits about three years after age 65, he adds.
Humana’s stock is defensive because its business is “agnostic to what is going on in the economy,” Mr. Quickmire notes. Its stock is undervalued and worth at least US$545 a share today, he suggests. The big risk is the U.S. adopting a universal health care system.
Paul MacDonald, chief investment officer and portfolio manager, Harvest Portfolios Group Inc.
The fund: Harvest Health Care Leaders Income ETF HHL-T
The pick: UnitedHealth Group Inc. UNH-N
UnitedHealth is an attractive investment because it’s not only the largest U.S. health insurer, but is also a diversified, vertically integrated company with its own physician network and a pharmacy benefits management business, Mr. MacDonald says. The Minnetonka, Minn.-based company is also the largest player in the Medicare Advantage seniors-insurance business, “which is an area of growth.”
The stock is defensive because of its low variability of earnings versus other sectors during an economic contraction and the necessity of its service, he adds.
UnitedHealth’s stock trades at a “reasonable valuation,” Mr. MacDonald says. “We have a relatively clear visibility to low double-digit, earnings growth per share.”
Job losses among members are a risk because they would likely shift from a company plan to a lower-margin private one, which could still be with UnitedHealth.
The pick: Merck & Co. MRK-N
This drug giant, which is known for oncology drugs, is a defensive play due to consistent demand for its products, which include vaccines and animal health treatments, Mr. MacDonald says. The Rahway, N.J.-based company’s Keytruda drug, used originally for lung cancer, makes up about 40 per cent of revenue.
Although its drug patent for Keytruda expires starting in 2028, there are ongoing clinical trials using that drug in various combinations for other cancers, he says. Merck has a strong balance sheet and has a disciplined approach to mergers and acquisitions, he adds.
The stock is “undervalued for the visibility and growth we see,” Mr. MacDonald says. The big risk is filling its drug pipeline when Keytruda comes off patent. Its Januvia diabetes drug was one of 10 drugs the U.S. government targeted recently for price discounts. That’s not a concern with a forecast impact of less than 1 per cent to revenue, he adds.
Robert Moffat, portfolio manager, Middlefield Capital Corp.
The fund: Middlefield Healthcare Dividend Fund and ETF MHCD-T
The pick: Thermo Fisher Scientific Inc. TMO-N
Shares of this global leader in scientific equipment and services are compelling because they give exposure to a secular trend of growing drug research and innovation, Mr. Moffat says. Waltham, Mass.-based Thermo Fisher sells everything from instruments to reagents and lab consumables. Its stock is defensive because the company sells to a stable market with drug companies making up 60 per cent of sales, he adds.
With acquisitions, such as contract research organization PPD Inc., it aims to be a “one-stop shop” for firms requiring clinical research, Mr. Moffat says. Services make up 40 per cent of revenue versus 25 per cent in 2019.
Thermo Fisher shares are valued attractively, and the recent pullback was due mainly to concerns of a short-term, softening in demand after a spending spree by its customers during the pandemic, he notes. The big risk is if its clients reduce their spending on research.
The pick: Becton Dickinson and Co. BDX-N
Becton Dickinson offers a defensive way to gain exposure to medical technology, which is “my favourite area of health care today,” Mr. Moffat says. The Franklin, N.J.-based company supplies everything from needles to syringes, blood-collection systems and intravenous bags.
The company benefits from increased demand for its products due to rising medical procedures, such as hip replacements, that were disrupted during the pandemic, he says. Its newer Alaris drug-infusion system recently got regulatory approval after a recall just over two years ago.
Becton Dickinson is the dominant player in its space and has maintained its earnings per share growth in each of the past three recessions, he notes. Its stock has recently traded at around 21 times forward earnings compared with 24 times for its medical technology peer group. The biggest risk is any supply chain disruption in delivering its products.
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