Four healthcare stock recommendations

Investment Committee, Switzer Dividend Growth Fund
Print This Post A A A

The healthcare sector is a traditional defensive sector. Defensive cash flows through all stages of an economic cycle as revenue and profits, in general, should be immune to shorter-term market cycles. In times of elevated market volatility, the demand for the defensive earnings streams tend to increase.

The healthcare sector is not generally a yield/dividend strategy from an investor’s perspective. The investment rationale is primarily to buy future defensive earnings that grow over time but are less volatile than the broader market.

The sector is increasingly important as the emerging economies become wealthier and therefore the demand for better, more improved healthcare is the natural progression. Therefore, the key is to invest in healthcare providers that have quality products with global leverage.

Risk

There is one risk in particular that can impact and challenge the defensive cash flows of this sector: government regulation or a major change in policy can alter the outlook. For example, the pathology sector domestically has gone through many changes since 2007 as the defensive nature of these cash flows have been diminished with changes in government policy.

Table 1 shows 10 healthcare stocks from small cap through to large cap exposures that represent different aspects of the sector. I’ve summarised the basic metrics and include both the UBS and broader consensus market outlook with buy, hold or sell ratings with a one-year price target.

The metrics used in the table are not exhaustive, but are a good summary of the market’s view on the outlook, or health, of various stocks going forward. Clearly, one can see from the expected dividend yields that the sector is not a dividend strategy. As for the 33% dividend target for Sigma Pharmaceutical, this is clearly suggesting to investors to be cautious.

Table 1: Basic health check on 10 Healthcare stocks

Recommendations

There are four Buy recommendations in the sector. CSL limited (CSL), Primary Healthcare (PRY), Resmed (RMD) and interestingly, a small cap company Sirtex (SRX). Both CSL and Resmed have featured in our various portfolios over the past year.

We recently took profits in CSL in our UBS Wealth Management Core Equity Defensive portfolio due to its strong share price performance since September last year, but it remains well supported and, of note, there are no sell recommendations from any research house. It is a great company that should be accumulated on any price correction.

George Boubouras, is the Head of Investment Strategy & Consulting, UBS Wealth Management, Australia.

Also in the Switzer Super Report:

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

Also from this edition