Full episode: Market Call for Tuesday, October 20, 2020
Paul MacDonald, chief investment officer and portfolio manager, Harvest Portfolios Group
Focus: U.S. Healthcare Stocks
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 healthcare subsectors.
In the shorter term, the pandemic has caused significant uncertainty for many industries. However, healthcare’s superior good status affords the underlying businesses predictability of cash flows and earnings. This visibility ought to be more valuable given the macro backdrop, however the sector is trading at a steep discount to the market. The discount is driven by uncertainty surrounding the U.S. election and volatility surrounding potential systemic changes to policies. The potential changes are well known and having more centrist policies from both parties all but eliminates risks of more draconian proposals that were circulated earlier in the year. This coupled with the fact that many of the companies have pivoted resources towards vaccine’s and treatments leads to a shifting of investor sentiment that we believe will continue through 2021.
Any further volatility is an opportunity as the fundamentals for the underlying businesses remain intact regardless of the outcome of the U.S. election. We continue to advocate diversity across the sub-sector to minimize individual binary risks.
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.
UNITEDHEALTH GROUP (UNH NYSE)
We have owned United Health since May of 2017 and it has been a top pick for over three 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. Volatility surrounding the elimination of private insurance was temporary in our view as their businesses core to the US healthcare system, no matter the outcome of the election. We continue to hold approximately 10 per cent weight towards the sub-sector, split between United Health and Anthem Inc.
BRISTOL MYERS SQUIBB (BMY NYSE)
We have owned Bristol for over five years and it is the first time it is a top pick.
We recently added sub-$200.Bristol is a high-quality, large cap pharmaceutical company. They have a diversified suite of products that treat many indications and have a global sales, manufacturing and R&D presence. The company had a growing exposure towards one immunotherapy that was expected to be a key driver of growth through the mid 2020s, though trial results were not as strong as those from Merck in a similar therapy. Bristol has subsequently made several acquisitions, including a very large acquisition of Celgene that closed in late 2019 and recently proposed MyoKardia Inc. The integration of the Celgene acquisition appears to be very smooth and has diversified the reliance on any key therapy. Importantly, the R&D results over the past six months have been surprising to the upside, from recently acquired assets and from it’s core immunotherapy, immunology and cardio-vascular franchises.
ABBVIE INC. (ABBV NASD)
We have owned Abbvie for over five years and is now first time on the top pick list.
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 and mergers and acquisitions. Their recent 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.
PAST PICKS: JULY 17TH, 2019
Merck & Co. (MRK NYSE)
- Then: $81.92
- Now: $78.76
- Return: -8%
- Total Return: -4%
Regeneron Pharmaceuticals (REGN NASD)
- Then: $299.42
- Now: $584.92
- Return: 95%
- Total Return: 95%
UnitedHealth Group (UNH NYSE)
- Then: $266.65
- Now: $328.33
- Return: 23%
- Total Return: 25%
Total Return Average: 39%