Consider rotating into health care to increase your returns.
Even as the market shifts and some sectors start to underperform, there are still opportunities if you look in the right places. “Health care funds are growing faster than the market,” says Stuart Michelson, a finance professor at Stetson University. The health care sector has historically demonstrated defensive traits by providing a stable dividend component and generating less volatility than the broader market, says Todd Rosenbluth, head of exchange-traded fund and mutual fund research at New York-based CFRA Research. “The sector has performed well during a strong year for equities, and there are many appealing health care investments,” he says. Here are six stocks and ETFs to consider adding to your portfolio.
Johnson & Johnson (ticker: JNJ)
Johnson & Johnson, the household name of personal care products, is a pharmaceutical behemoth that manufactures drugs to treat serious and chronic diseases and medical conditions such as rheumatoid arthritis, HIV, Alzheimer’s, lung cancer and diabetes. The company said that its CEO Alex Gorsky will resign in January 2022. He will be replaced by Joaquin Duato, the vice chairman of the company’s executive committee. The company’s COVID-19 vaccine remains the only single-shot option in the U.S. JNJ faces headwinds, however, including consumer lawsuits. In June, Johnson & Johnson said it would pay $263 million to settle a New York state suit concerning its role in the opioid crisis. Despite its challenges, the stock is undervalued, Rosenbluth says.
Pfizer Inc. (PFE)
Pharmaceutical giant Pfizer also remains undervalued, Rosenbluth says. The company manufactures one of the COVID-19 vaccines and is developing an antiviral pill to reduce COVID-19 symptoms in people who are already infected. The company anticipates that late-stage data on the oral antiviral will be available in several months. Positive data and approval from the Food and Drug Administration mean that the drug could provide a large revenue opportunity for the company since an oral antiviral could result in widespread use and slow down infection rates. Analysts at Jefferies estimate that an antiviral treatment for COVID-19 could be a $10 billion-a-year drug if it is convenient and effective.
Cardinal Health Inc. (CAH)
Cardinal Health is a health care company that shows potential even though it is more moderately sized, Rosenbluth says. The company reported fourth-quarter revenue of $42.6 billion, a 16% gain — although profit margins for the pharmaceutical segment did not increase. Cardinal Health will pay $6.4 billion over 18 years as part of its settlement agreement with state and local government entities on claims it contributed to the opioid crisis. CEO Mike Kaufmann said the company will increase its cash flow generation with its divestiture of the Cordis business, extending its Red Oak Sourcing agreement with CVS Health and through the identification of $250 million of additional cost savings opportunities. Cardinal Health’s stock price is around $51, a decline from its March high of $62.96.
Health Care Select Sector SPDR ETF (XLV)
The Health Care Select Sector SPDR ETF’s performance offers modest risks with a high reward potential and low costs compared to sector equity ETF peers, Rosenbluth says. The ETF holds stocks such as Johnson & Johnson, UnitedHealth Group Inc. (UNH), Pfizer, Abbott Laboratories (ABT) and Thermo Fisher Scientific Inc. (TMO) that all produce strong dividend returns. “Given the wide range of appealing stocks, we like both the Health Care Select Sector SPDR ETF and Invesco S&P 500 Equal Weight Health Care ETF (RYH),” he says. “These ETFs own the same stocks, but RYH owns an equal amount of money in all rather than favoring the megacaps.” The expense ratio is 0.12%, the one-year return is 26.7% and the three-year return is 13.8%.
iShares U.S. Healthcare Providers ETF (IHF)
iShares U.S. Healthcare Providers ETF offers a more concentrated portfolio with companies that focus on health insurance, diagnostics and specialized treatment such as UnitedHealth Group, CVS Health Corp. (CVS), Anthem Inc. (ANTM) and Centene Corp. (CNC). The expense ratio is slightly higher at 0.42%, and the fund has a one-year return of 31.7% and a three-year return of 12.2%. Most investors should invest 5% to 10% of their portfolio in the health care sector since the industry is booming due to aging Americans and higher costs for diagnosis and treatment, Michelson says. Investing a larger percentage in the sector can create “undue sector risk in an investor’s portfolio,” he says.
Vanguard Health Care ETF (VHT)
The Vanguard Health Care ETF tracks the performance of a benchmark index of large, medium and small U.S. companies in the health care sector. There are 455 stocks in the index, and 24% is allocated to health care equipment and pharmaceutical companies while 10.3% is allocated to life sciences tools and services companies. The top three holdings are Johnson & Johnson, UnitedHealth Group and Pfizer. The expense ratio is 0.10%, the one-year return is 27% and the three-year return is 14.3%. Health care is a defensive industry since it has a lower correlation with other major industries, Michelson says. “Many pharmaceutical companies pay regular and increasing dividends,” he says. “Firms that regularly pay dividends tend to be more stable and produce steady cash flows over varying market conditions.”
Best health care stocks and ETFs to buy:
— Johnson & Johnson (JNJ)
— Pfizer Inc. (PFE)
— Cardinal Health Inc. (CAH)
— Health Care Select Sector SPDR ETF (XLV)
— iShares U.S. Health Care Providers ETF (IHF)
— Vanguard Health Care ETF (VHT)
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