Full episode: Market Call Tonight for Monday, December 3, 2018
Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group
Focus: Healthcare stocks
The healthcare sector is a direct beneficiary of one of the only secular, non-cyclical and permanent investment themes: the global aging population. Furthermore, as wealth increases in developing economies there’s a disproportionate increase in the amount of spending on healthcare. These will likely result in significantly increased demand for healthcare products and services over time. Finally, technological innovations coupled with regulatory advancements are paving the way for catalysts across the healthcare subsectors.
Widely known political discussions on how to deal with the rising healthcare costs over recent years has caused sector volatility to increase and valuation multiples to contract. During 2018, the political discussion driven by the Trump administration has filtered to subsectors beyond drug manufacturers and is particularly focused on the “middlemen,” an area where the Harvest Healthcare Leaders Income ETF has reduced exposure. This change in the political rhetoric has prompted multiples in many of the healthcare sub-sectors to start to move higher, resulting in healthcare being the top-performing sector year-to-date in the S&P 500 Index. With broader market volatility, healthcare benefits from its superior good status that has resulted in many of the underlying stocks having defensive characteristics historically. This has also contributed to the sectors performance in 2018.
The underlying outlook remains robust, with numerous short- and medium-term stock-specific catalysts coupled with expectations of improving top and bottom line financial performance.
Lastly, the increase in the implied volatility levels has resulted in attractive income derived from covered call strategies such as the one used in the Healthcare Leaders Income Fund.
MERCK & CO (MRK.N)
Merck & Co. has been one of our top picks since summer of 2016. It’s a large-cap diversified drug manufacturing company that has a proven ability to generate consistent returns, offseting patent declines due to their deep pipeline of new drugs from acquisitions and organic R&D. The company has an attractive yield and balance sheet. Of note is that Merck has continued to generate positive developments from Keytruda, its leading immuno-oncology therapy, with recent data validating its market leadership. This trend appears to becoming more robust.
Celgene is a leading biopharmaceutical company that focuses on research and the development of therapies to treat cancer and inflammation-related diseases. The company has made several missteps over the past 12 to 18 months, including missing on guidance and recent FDA applications. This has caused sentiment towards the company and management to become overly pessimistic. Recent trials and combinations of the company’s key drug, Revlimid, appear promising and we believe there’s an over-emphasis on the patent expiry in 2022. This is a top pick given their balance sheet, cash flow profile and pipeline, coupled with it trading at levels where historically pharma and bio-pharma have troughed ahead of patent expirations.
UNITEDHEALTH GROUP (UNH.N)
UnitedHealth Group has also been a top pick since mid-2016. It’s the largest health insurer in the U.S., covering some 70 million lives. In addition to leading brand recognition, United also stands to benefit from significant positive macro tailwinds that are expected to occur over the medium term. It has diversified operations and their acquisition of pharmacy benefits manager Catamaran provides them a unique competitive positioning. We continue to hold approximately 10 per cent weight towards the sub-sector, split between United Health and Anthem Inc.
PAST PICKS: JULY 5, 2018
- Then: $240.05
- Now: $296.25
- Return: 23%
- Total return: 24%
- Then: $187.36
- Now: $202.93
- Return: 8%
- Total return: 10%
MERCK & CO (MRK.N)
- Then: $61.64
- Now: $79.22
- Return: 29%
- Total return: 29%
Total return average: 21%
Harvest Healthcare Leaders Income ETF (HHL.TO)
Performance as of: Nov. 30, 2018
- 1 month: 5.66% fund, 5.45% index
- 1 year: 9.58% fund, 11.44% index
- 3 years 22.32% fund, 29.64% index
INDEX: MSCI World Healthcare Net Total Return USD Index.
Returns are net of fees as measured by HHL.TO class A return.
TOP 5 HOLDINGS AND WEIGHTINGS
As of: Oct. 31, 2018.
- Boston Scientific Corporation: 5.6%
- Anthem: 5.6%
- Johnson & Johnson: 5.4%
- Merck & Co: 5.4%
- Sanofi: 5.3%