Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group
Focus: Healthcare stocks

MARKET OUTLOOK

The healthcare sector is a direct beneficiary of one of the only secular, non-cyclical and permanent investment themes: the global aging population. Moreover, as wealth increases in developing economies, there’s 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 healthcare subsectors.

Political discussions on how to deal with the rising healthcare costs over recent years have caused sector volatility to increase and valuation multiples to contract. Healthcare is expected to be a key topic during the 2020 U.S. presidential race and political posturing is happening earlier in the election cycle than most anticipated, with both parties so divided on potential policies that it’s difficult to move even basic proposals forward. We view the correction as an opportunity, with the fundamentals for the underlying businesses remaining intact and valuation multiples in many cases compressing to levels not seen in over a decade. We continue to advocate diversity across the sub-sector to minimize individual binary risks.

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.

TOP PICKS

MERCK (MRK.N)

Merck & Co has been one of our top picks since summer of 2016.  It is a large-cap diversified drug manufacturing company with a proven ability to generate consistent returns and offset 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, with some 150 ongoing trials including over 50 combination trials as Keytruda sets the stage for continued catalysts through 2020.

REGENERON PHARMACEUTICALS (REGN.O)

Regeneron is a science-driven large-cap biotechnology company that has several core products generating attractive free cash flows.  Specifically, they’re in collaboration with Sanofi on their drug Dupixent, a leading treatment for severe atopic dermatitis and with significant potential in other indications, including severe asthma.  They also have Eylea, utilized to treat specific eye diseases.  The company has numerous ongoing late-stage trials across multiple indications. 

Regeneron is a new Top Pick for us, driven by the valuation having compressed significantly on concerns over U.S. Medicare Part B drug pricing policy proposals. We believe these are more than reflected in the current price.

UNITEDHEALTH GROUP (UNH.N) 

UnitedHealth 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. The company 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 UnitedHealth and Anthem. 

Recent commentary from Bernie Sanders suggested that under his plan there would be no need for private insurance companies.  We view this as an opportunity, as valuation multiples have moved into very attractive levels. Their business is core to the U.S. healthcare system no matter the outcome of the election.

PAST PICKS: JULY 5, 2018

ANTHEM (ANTM.O)

• Then: $240.05
• Now: $304.69
• Return: 27%
• Total return: 28%

AMGEN (AMGN.O)

• Then: $187.36
• Now: $177.06
• Return: -5%
• Total return: -3%

MERCK (MRK.N)

• Then: $61.64
• Now: $81.92
• Return: 33%
• Total return: 37%

Total return average: 21%

FUND PROFILE

Harvest Healthcare Leaders Income ETF (HHL.TO)
Performance as of: June 30, 2019

• 1 month: 5.7% fund, 6.8% index
• 1 year: 2.0% fund, 10.8% index
• 3 years: 11.3% fund, 27.7% index

INDEX: MSCI World Healthcare Net Total Return USD Index.
Returns are based on reinvested dividends, net of fees and annualized.

TOP 5 HOLDINGS

1. Allergan: 6.1%
2. Boston Scientific: 5.6%
3. Stryker: 5.2%
4. Gilead Sciences: 5.2%
5. GlaxoSmithKline: 5.1%

WEBSITE: harvestportfolios.com
TWITTER: @harvestetfs