Despite Recent Downturn, Healthcare is the Investment of the Decade
World equity markets are trading at a high 2015E* 15 times price-to-earnings (PE), led by highly priced United States (US) stocks at about 2015E* 17 times PE. However, uncertainty has risen after recent shocks in Asia, particularly in China.
So how should investors proceed? If looking for a long-term investment, focus on healthcare related stocks, which are driven by higher life expectancy and a corresponding rise in lifestyle illnesses. After researching 1,200 healthcare companies globally, we have concluded that the health sector is one of the most defensive. The sector hasn’t shown a loss for the past 18 years and because of these trends, the healthcare sector offers strong growth potential. Over this period, emerging markets’ (EM) healthcare company earnings have grown approximately 16% annually versus developed markets’ (DM) healthcare, which is estimated to be about 4%.
Academic research suggests that the average investor should hold 10 stocks. This concentrated (and diversified) portfolio reduces risk related to a single company’s poor earnings, but keeps the possibility for outperformance in total. Another way to effectively reduce company specific risk is to own an exchange trade fund (ETF).
You can take advantage of this long-term trend by buying a global ETF such as iShares Global Healthcare ETF (IXJ). This ETF holds about 90 stocks across US and non-US developed markets. Another option is to combine the Vanguard Health Care ETF (VHT), which holds nearly 350 US healthcare stocks, with the SPDR® S&P® International Health Care Sector ETF (IRY) which owns about 120 healthcare stocks outside of the US.
If you rather pick your own stocks, an interesting developed market large-cap stock is the medical distributor Cardinal Health, Inc. (CAH). It is highly efficient in asset turnover and has generated 15% return on equity (ROE) on average for the past five years. Its strong balance sheet and low net debt-to-equity means it is low risk. CAH is trading at about 2016E* 15 times price earnings (PE) (below global healthcare at about 18 times) but it offers better earnings growth.
In the emerging markets, an interesting mid-cap stock is the Chinese pharmaceutical manufacturer Huadong Medicine Co., Ltd (000963). Its revenue has shown a compound annual growth rate of 19% for the past five years, while delivering an average ROE of 27%. The stock looks attractive on a 2015E* PEG (price/earnings to growth) ratio of 0.5.
Note: * Institutional Brokers' Estimate System (I/B/E/S) estimate
Andrew Stotz is the CEO and co-founder of A. Stotz Investment Research, a financial analysis firm located in both Hong Kong and Bangkok, Thailand. Stotz has over two decades of experience as a research analyst, but is also a renowned lecturer, author, and entrepreneur. More information about Andrew Stotz can be found online at www.AStotz.com.