Paul MacDonald's Top Picks: May 3, 2019

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 election. Healthcare policy posturing by some Democrats running for the leadership of the party is seen to be extreme and raise concerns and even panic that the healthcare companies would be victimized under certain policy proposals. We view the proposals such as those from Bernie Sanders as political posturing and a way to capture headlines, being highly unlikely to impact the companies operating in the sector. Political posturing happened earlier than most had anticipated in the election cycle and 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

UNITEDHEALTH GROUP (UNH.N)

UnitedHealth is the largest health insurer in the U.S., covering some 70 million people. 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 subsector split between UnitedHealth and Anthem Inc. 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. We view their businesses as core to the U.S. healthcare system.

BRISTOL-MYERS SQUIBB (BMY.N)

Bristol-Myers Squibb Co. is a large-cap diversified drug manufacturing company. We had preferred in our large-cap pharmaceuticals Merck over Bristol over the past several years as the science had been working better for Merck in the core Immuno-therapy areas. Recent underperformance by Bristol we believe has been overdone and the stock has come under further pressure as it made a high-profile acquisition of Celgene. While the company is heavily reliant on its immuno-therapy franchise, adding a deep pipeline with the recent acquisition should reduce that risk. Other core areas of the business include its anticoagulant drug Eliquis, while late-stage trial read-outs during the summer could also be catalysts.

AMGEN (AMGN.O)

Amgen is one of the largest biotechnology companies in the world. It has a proven ability to extract value through acquiring late-stage drugs coupled with a deep organic pipeline. Amgen has significant biotech and biosimilar exposure without the binary outcomes that many smaller biotech companies have. Several drugs coming off patent have seen less attrition than had been expected while launches of new drugs in indications such as migraines and an innovative cholesterol-lowering drug.

PAST PICKS: MARCH 21, 2018

CELGENE (CELG.O)

• Then: $88.31
• Now: $96.88
• Return: 10%
• Total return: 10%

MERCK (MRK.N)

• Then: $54.69
• Now: $80.00
• Return: 46%
• Total return: 51%

STRYKER (SYK.N)

• Then: $164.73
• Now: $190.71
• Return: 16%
• Total return: 17%

Total return average: 26%

FUND PROFILE

HARVEST HEALTHCARE LEADERS INCOME ETF (HHL.TO)

The Harvest Healthcare Leaders Income ETF invests in an equally weighted portfolio of 20 large-cap healthcare issuers that trade on a North American exchange and have listed options. The Fund uses a quantitative screening process for security selection and an active and flexible covered-call strategy to generate additional income. There are two classes of the ETF that trade on the Toronto Stock Exchange: HHL.TO is priced in Canadian dollars and hedges the portfolio's non-Canadian currency exposure, while HHL_u.TO trades in U.S. dollars and is not currency-hedged.

Performance as of: March 31, 2019

• 1 month: 5.4% fund, 1.7% index
• 1 year: 6.9% fund, 12.2% index
• 3 years: 7.0% fund, 10.9% 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. Stryker: 6%
2. Johnson & Johnson: 5.6%
3. Allergan: 5.6%
4. GlaxosmithKline: 5.4%
5. Sanofi: 5.4%

WEBSITE: harvestportfolios.com