Paul MacDonald, chief investment officer and portfolio manager, Harvest Portfolios Group Focus: large cap healthcare stocks
Top Picks: Merck & Co, AbbVie, UnitedHealth Group
MARKET OUTLOOK:
The question following now two back-to-back twenty plus per cent moves in the broader markets is “what now?” and ultimately will markets be “Trumped.”
Four key points to our outlook:
- Economic data continues to support the U.S. Federal Reserve has threaded the needle with a soft landing.
- Earnings growth is reaccelerating with expanded breadth. This is healthy.
- Markets don’t correct on returns or valuations alone. While elevated not out of whack historically and could see higher returns and valuations on strong earnings, and that is being validated very early this earnings season.
- The biggest known unknown is unequivocally policy risk.
Based on our outlook, diversification is key. Sector wise, U.S. Industrials are overlooked and may benefit from incoming acceleration of some of trends already in place while U.S. banks benefit from some deregulation, and an improving economic backdrop.
Healthcare however has lagged significantly. The broader market has been driven by factors like mega-cap growth, momentum and Trump 2.0 trades versus some shorter-term headwinds within healthcare. Specifically, a more defensive sector that has had sentiment turn out of favour in the very short term due to recent headlines within specific sub-sectors, resulting in attractive entry into the broader healthcare sector.
Fundamentals driving healthcare over the medium to longer term, such as aging populations, developing market demand and technological innovation, are permanent and non-cyclical drivers. Coupled with attractive valuations following multiple contraction and with defensive characteristics, position the sector as a core holding over the near and medium term.
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TOP PICKS:
Merck & Co (MRK NYSE)
We have owned the company for five plus years.
Merck & Co is a large-cap diversified drug manufacturing company. It has a proven ability to generate consistent returns with a deep pipeline of new drugs from acquisitions and organic research and development. It is diversified across multiple areas of treatment ranging from diabetes, vaccines, animal health and oncology. Merck has continued to generate positive developments from Keytruda, its leading immuno-oncology therapy. Concerns surrounding increased competition later in the decade with Keytruda we believe will be offset via changing delivery mechanisms and a robust research and development pipeline. Recent rhetoric and perceptions surrounding vaccines we believe are transient and ultimately their vaccine business will have robust growth both in domestic NA markets and China across multiple vaccine business lines. Major acquisitions from earlier in the decade are starting to accelerate financially while we believe the pivot towards significant licencing agreements in 2024 opens the door for new pipeline opportunities later in the decade.
AbbVie (ABBV NASD)
We have owned the company for five plus years.
AbbVie is a large capitalization biotechnology company. It is the maker of Humira, one of the world’s largest selling biologics which generated some US$21 billion in annual revenues in 2022. That drug went off-patent in 2023, and revenues are expected to drop to $7billion in 2025. AbbVie has done an exceptional job at redeploying capital. New launches in similar indications with Skyrizi and Rinvoq, coupled with a strong aesthetics, oncology and neuroscience platforms have more than offset Humira and result in solid visibility of double-digit EPS through 2030. A recent missed trial caused shares to pullback in a short period, we view this as an attractive entry point for those looking over the medium term in a diversified portfolio.
UnitedHealth Group (UNH NYSE)
We have owned the company for five plus years.
It is the largest health insurer in the U.S., covering some 50 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 to long term. It has diversified operations and is vertically integrated across managed care business lines. We continue to hold approximately 10 per cent weight towards the sub-sector, split between United Health and Elevance Inc. Recent headlines and policy risks under the new administration coupled with some post covid recalibrating, have resulted in a meaningful pull back. We view this as an opportunity as valuation multiples have moved into very attractive levels and view their businesses as core to the delivery of healthcare in the United States.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| MRK-N | N | N | Y |
| ABBV-Q | N | N | Y |
| UNH-N | N | N | Y |
PAST PICKS: May 9, 2023
Stryker (SYK NYSE)
- Then: US$283.65
- Now: US$396.86
- Return: 40%
- Total Return: 42%
Abbott Laboratories (ABT NYSE)
- Then: US$110.25
- Now: US$128.22
- Return: 16%
- Total Return: 20%
Elevance Health (ELV NYSE)
- Then: US$460.83
- Now: US$411.70
- Return: -11%
- Total Return: -8%
Total Return Average: 18%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| SKY NYSE | N | N | Y |
| ABT NYSE | N | N | Y |
| ELV NYSE | N | N | Y |
