Full episode: Market Call for Thursday, February 11, 2021
Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group
Focus: Healthcare stocks
While the broad markets continue to track to new highs, underneath the surface there has been some rotational undercurrents. While the great rotation out of growth and into value has long been talked about, that shift has been towards more cyclical areas and into momentum, where in many cases the valuations are detached from fundamentals.
Healthcare’s superior good status affords the underlying businesses predictability of cash flows and earnings at a time when there remains significant uncertainty for many industries. This visibility has been seen during the most recent quarterly results for many companies. At the same time, the macro- backdrop for the sector has continued to improve significantly with the passing of the election and more centrist policies coupled with a halo effect as companies have pivoted resources to become a potential solution to the pandemic. We believe that the near 20 year low in valuations is unwarranted given the solid improvement in the macro environment and solid outlooks with clear visibility.
Over the medium to long term, the healthcare sector is a direct beneficiary of one of the only secular, non-cyclical and permanent investment themes: the global aging population. Secondly, as wealth increases in developing economies, there is a disproportionate increase in the amount of spending on healthcare. This will likely result in significantly increased demand for healthcare products and services over time. Finally, technological innovations, coupled with regulatory advancements, pave the way for catalysts across the healthcare subsectors.
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 Harvest Healthcare Leaders Income ETF.
We initiated a position in January in 2017.
Stryker is a high-quality large cap medtech company that has a proven history of execution. They have one of the fastest growth profiles in the large-cap medtech universe, solid balance sheet flexibility and a diversified business. There continues to be positive sentiment towards robotic surgical equipment, an area where Stryker’s Mako system is an industry pioneer and leader. Synergies are accruing from their recent acquisition and pent up demand appears to be filtering through in elective surgeries as economies re-open.
We have owned Abbvie for over five years and was a recent top pick in October.
AbbVie is a large capitalization biotechnology company. They are the maker of Humira, which generates some US$19 billion in annual revenues and is used across many immune-related disorders. That drug does go off-patent in 2023, so the concern is that revenues will fall. Yet AbbVie has been doing a very good job of taking that cash generator and reinvesting in R&D, mergers and acquisitions. Backfilling their future patent with R&D success in similar treatments and through M&A. Their acquisition of Allergan, the maker of Botox, significantly reduces their revenue reliance on any one particular drug. Similarly, they have expanded into other therapy areas including the partnership in oncology with Johnson & Johnson and have a very strong late stage pipeline of trials coming over the next 12 months.
We reinitiated a position in Anthem in January.
Anthem is a leading health insurer in the U.S in 14 states as a licensee of Blue Cross through its Blue Cross & Blue Shield association. In addition to leading brand recognition, Anthem stands to benefit from significant positive macro tailwinds that are expected to occur over the medium term. It has diversified operations and have been successfully building out their pharmacy benefits manager. The company has a diversified client base with a mix of commercial and government plans. Volatility surrounding the elimination of private insurance was temporary in our view as their businesses core to the U.S. healthcare system. Valuation is an anomaly. We continue to hold approximately 10 per cent weight towards the sub-sector, split between United Health and Anthem Inc.
PAST PICKS: January 17, 2020
UNITEDHEALTH GROUP (UNH NYSE)
- Then: $298.47
- Now: $333.96
- Return: +12%
- Total Return: +14%
PFIZER (PFE NYSE)
- Then: $40.51
- Now: $34.49
- Return: -10%
- Total Return: -5%
STRYKER (SYK NYSE)
- Then: $212.17
- Now: $243.95
- Return: +15%
- Total Return: +16%
Total Return Average: +8%