For investors torn between buying stocks and waiting for a pullback, we offer you healthcare stocks. Neither purely defensive nor purely growth, they offer among the best of both—and perhaps a way out of the conundrum.
The defensiveness was on full display during 2022, when the
Health Care Select Sector SPDR
exchange-traded fund (ticker: XLV) lost just 2.1%, trouncing the
S&P 500’s
18% loss. There’s a good reason for that. No matter what’s going on in the economy, people still need to take their medications and visit the doctor. Revenue and earnings tend to be significantly less volatile than the broader market.
That strength hasn’t continued this year—technology and communication services shares have led, as healthcare stocks have fallen 2.3%. The S&P 500 has gained 8.4%, including reinvested dividends, as investors treat healthcare like a defensive sector.
Yet there’s real growth to be had there, too. In fact, healthcare has averaged 12% earnings growth a year since the mid-1980s, the fastest of any sector—ahead even of tech. That growth has been driven by aging populations in the U.S. and other developed countries, richer consumers in emerging markets, and new forms of treatment for once-untreatable disorders.
The decline to start off the year has made valuations more attractive. Healthcare currently trades at a 5% discount to the S&P 500, versus a historical premium of around 11%—while the fundamental outlook is hardly different.
Kevin Walkush, a portfolio manager at the $10.1 billion
Jensen Quality Growth
fund (JENSX), likes several companies in the sector for their defensive downside protection, but with innovation and pricing power driving attractive long-term growth.
He points to
Stryker
(SYK), the leader in hip and knee replacement devices. The $108 billion company also sells beds and other equipment for hospitals, which is more of a near-term driver for growth, per Walkush, and it’s an early mover in robotic surgeries for joint replacements. He sees a tailwind from more complex procedures taking place in emerging markets and aging populations wearing down their joints in developed countries.
Pfizer
(PFE), a Barron’s pick earlier this year, is another favorite of Walkush. The pharma company knocked it out of the park during the Covid-19 pandemic, developing and commercializing its vaccine with partner
BioNTech
(BNTX) in record time. The same approach can be applied to future drug and vaccine development, Walkush says, speeding up innovation.
The Covid-19 vaccine was a massive cash cow for Pfizer. Revenue in 2021 and 2022 was double the previous two years, as free cash flow nearly tripled. Rather than paying a special dividend or buying back more stock, management has gone on an acquisition spree to reload the company’s drug-development pipeline. Pfizer has signed eight deals since the start of 2021, with companies involved in treatments for neurological diseases and sickle cell disease, a DNA testing firm, and the $41 billion acquisition of
Seagen
(SGEN), which is working on cancer therapies.
Walkush calls the Seagen acquisition pricey—it’s a “show-me story,” he says—but has confidence in Pfizer management figuring it out. He lauds the company for taking its one-time Covid-19 vaccine windfall and investing in long-term growth.
Pfizer stock’s valuation isn’t demanding: Shares trade for 11 times 12-month forward earnings, around their average over the past half-decade and compared with 18 times for the S&P 500.
It may take patience, but don’t expect it to stay that cheap forever.
Write to Nicholas Jasinski at [email protected]
Read the full article here
