Paul MacDonald, Chief Investment Officer & Portfolio Manager, Harvest Portfolios Group

Focus: Healthcare stocks

Top picks: Stryker, Abbott Labs, Elevance Health

MARKET OUTLOOK:

The broader U.S. market experienced significant volatility in the first quarter, yet the healthcare sector, typically considered defensive, outperformed significantly. This initial resilience was driven by investor flight to safety amid escalating trade tensions and economic uncertainty, times that one would expect defensive areas and those with relatively less tariff implications, to outperform.

However, a dramatic shift occurred post “Liberation Day” and the associated tariff announcements. As the market broadly gained momentum on a perceived easing of some economic anxieties and a rotation into cyclical and growth sectors, defensive areas like healthcare underperformed. This was further exacerbated by policy concerns, particularly renewed focus on drug pricing reforms and the threat of new pharmaceutical tariffs, coupled with uncertainty in the new leadership of health and human services, all weighed heavily on investor sentiment and fueled continued underperformance in the sector.

These dynamics have all contributed to significant compression in valuation metrics for many of the companies within the sector. This has resulted in the divergence in valuations compared to the broader market hitting levels rarely seen since the early 1990’s. Initial earnings results have however pointed to some optimism in the sector, with less tariff related impacts than had been expected and generally positive commentary regarding potential policy changes. The longer-term positive backdrop of aging populations, technological innovations and developing markets remains in-tact as we await catalysts in the shorter term to look through some of the policy uncertainty and political rhetoric.

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TOP PICKS:

Stryker (SYK NYSE)

We initiated a position in January in 2017. Stryker is a high-quality large cap Medtech company that has a proven history of execution. They have a diversified portfolio of medical surgical equipment, surgical navigation systems and various patient handling and emergency medical equipment. They have a strong orthopedics business with equipment for replacing hips, knees and have continued to expand exposure in one of the fastest growing areas in the healthcare space, robotic assisted surgeries. Stryker’s Mako system is an industry pioneer and leader and has been and is expected to be a key driver of growth over the coming five years.

Abbott Labs (ABT NYSE)

We reinitiated a position in Abbott in July 2019. Abbott is a large capitalization diversified medical equipment company. Through strong research and development productivity driving organic growth and successfully implementing large scale mergers and acquisitions (M&A), the company has become a dominant market leader in diagnostic equipment such as hospital laboratory equipment and across medical products specifically in cardiovascular and diabetes care.

Innovation within cardiovascular products and continuous glucose monitoring products such as the Freestyle Libre, drive visible growth through 2030. Recent quarterly earnings gave guidance that was just slightly below market expectations, however given the macro backdrop, the stock sold off significantly and we believe represents an attractive entry point for those with medium time horizon.

Elevance Health (ELV NYSE)

We have held Elevance (formerly known as Anthem) for over 10 years. Elevance Health is one of the largest integrated health insurers in the United States. They provide health benefits to over 45 million people through their ownership of Blue Cross & Blue Shield programs and subsidiaries like Wellpoint. They offer insurance both private and corporate plans and also administer medicare and medicaid programs for the government. The insurance represents two thirds of their overall business while their Carelon segment represents their pharmacy benefits manager and other services such as integrated doctors networks.

Amidst an already uncertain policy backdrop, the broader managed care sectors have been impacted by higher utilization rates resulting in higher costs than the market had expected. This has caused stocks to come under meaningful pressure and valuations to contract given the uncertainty in the very short term. We look for signs and guidance of a troughing in earnings following the third quarter as a key catalyst for rerating.

PAST PICKS: JAN. 27, 2024

Merck & Co (MRK NYSE)

Then: US$97.94

Now: US$80.93

Return: -17%

Total Return: -16%

AbbVie (ABBV NASD)

Then: US$176.90

Now: US$188.87

Return: 7%

Total Return: 9%

UnitedHealth Group (UNH NYSE)

Then: US$543.52

Now: US$266.81

Return: -51%

Total Return: -50%

Total Return Average: -19%