Paul MacDonald's Top Picks: February 3, 2022

MARKET OUTLOOK:

Broader market volatility has increased in the shorter term, driven by persistent inflation, supply chain congestion, heightened geopolitical risks and concerns about significantly higher U.S. interest rates. 

While we believe growth remains intact for the broader markets, it is decelerating and is more susceptible to some of these exogenous risks that have increased in the shorter term. This has caused market gyrations to be exacerbated as investors reposition between areas such as high growth, value, offensive and defensive or small cap and larger cap. 

We believe the companies and areas of the market that have high-quality financial metrics, visibility into their operations and financials, exposure to longer term secular growth, and attractive valuations are well positioned for 2022.  Against this macro backdrop, large capitalization healthcare companies are well positioned.

There are three primary long-term drivers for the healthcare sector: Aging populations, technological innovation, and growth from developing markets, where there is a disproportionate share of increased wealth expended on healthcare needs.  

There have been several positive shorter-term factors that we believe improved the sentiment and attractiveness of the sector since 2020, prior to the onset of the pandemic. Firstly, extreme political rhetoric seen pre-election throughout 2019 is lower as Democratic policy initiatives, including those in the Build Back Better bill, are more centrist in nature with potential outcomes well known. This, coupled with the healthcare industry’s commitment to finding treatments and vaccines for COVID-19, has improved public perception and investor sentiment. Lastly, healthcare is known for its superior good status and has often performed well during uncertain times. 

The shorter-term visibility into the underlying businesses, attractive valuations, improved investor sentiment and political climate, coupled with the long term structurally positive macro drivers, lay the foundation for our positive outlook for the sector.

TOP PICKS:

UnitedHealth Group Inc (UNH NYSE)
We have owned United Health since May of 2017 and has been a top pick for over 3 years.  

United is 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 provides them a unique competitive positioning and has one of the most vertically integrated business models in the sector.  Quarter over quarter, the company continues to execute at a high level and remains the leader in the managed care sector.

We continue to hold approximately 10 per cent weight towards the sub-sector, split between United Health and Anthem Inc.  

Zoetis Inc (ZTS NYSE)
We have owned Zoetis since April of 2020. First time top pick.

Zoetis is the largest animal health company involved in research, development, and commercialization of animal health medicines and vaccines. It focuses its business on two segments – livestock and companion animals (pets), with the latter expected to form a majority share of revenues and profit, as the segment experiences higher growth and margins. 

Zoetis is a leader in innovation with best-in-class and first-to-market products such as Simparica Trio (flea, tick, works triple combo drug) and injectable drugs for chronic osteoarthritic pain management in dogs and cats. 

They have also leveraged their brand and distribution reach to expand into complementary businesses such as diagnostics and pet insurance. We like the company for its demonstrated ability to execute on its strategy of growth and execution, a strong balance sheet to aid inorganic growth through acquisitions. 

The recent risk-off episode saw high-growth names being sold off, which led to Zoetis trading at a much lower P/E multiple despite no change in the underlying business and strategy. This provides an attractive entry point to add to a position that has a robust medium term outlook.

Pfizer (PFE NYSE)
We have owned Pfizer for over 7 years. First time top pick.

Pfizer is the one of the largest pharmaceutical research firms producing medicines for cardiovascular health, oncology, inflammation, and immunology with multiple drugs with over US$1 billion in annual sales. 

Pfizer now operates solely in the research & development, marketing, and sales of biopharmaceutical products since the spin-out of their consumer products and generic medicine businesses. Pfizer leadership has executed very well in the last couple of years to utilize its established R&D platform and experience to get the COVID vaccine and treatment developed and approved. 

The uptick in revenue and profits from the COVID-19 related business has helped the company strengthen its balance sheet. Using the windfall, Pfizer has started to execute on M&A strategy to strengthen its core businesses with complementary products in oncology, inflammation, and immunology to fill gaps in the existing line-up and create a pipeline of products that should deliver incremental revenues starting 2025-26. If management executes its strategy with success, we expect Pfizer’s multiples to rerate and catch-up with large-cap biopharma peers.

PAST PICKS: February 11, 2021

STRYKER (SYK NYSE)

• Then: $245.34
• Now: $252.99
• Return: 3%
• Total Return: 4%

ABBVIE INC (ABBV NASD)

• Then: $103.75
• Now: $139.94
• Return: 35%
• Total Return: 40%

ANTHEM INC (ANTM NASD)

• Then: $292.84
• Now: $454.05
• Return: 55%
• Total Return: 57%

Total Return Average: 34%