MARKET OUTLOOK – Focus: Large-cap healthcare stocks

January 20, 2020

The healthcare sector is a direct beneficiary of one of the only secular, non-cyclical and permanent investment themes: the global aging population. Moreover, as wealth increases in developing economies, there’s a disproportionate increase in the amount of spending on healthcare which will likely result in significantly increased demand for healthcare products and services over time. Finally, technological innovations coupled with regulatory advancements pave the way forward for catalysts across healthcare subsectors.

Political discussions on how to deal with the rising healthcare costs over recent years have caused volatility in the sector to increase and valuation multiples to contract. This was on display during the first nine months of 2019 as investor sentiment towards the sector worsened. Ahead of third-quarter earnings, however, there was an apparent tone shift. More positive commentary and overall sentiment towards the sector also coincided with a softening of extreme political rhetoric. This caused the sector to regain strength through the end of the year. This is poised to continue through 2020.

Still, healthcare is expected to be a key topic during the 2020 U.S. presidential election. Even intra-party views on potential policies are divergent, resulting in the advancement of even basic healthcare proposals proving to be difficult. We view any further volatility as an opportunity, as fundamentals for the underlying businesses remain intact. We continue to advocate diversity across subsectors to minimize individual binary risks.

Lastly, the increase in the implied volatility levels has resulted in attractive income derived from covered call strategies such as the one used in the Harvest Healthcare Leaders Income Fund.

Healthcare Outlook – Excerpts from BNN (January 17,2020)

UNITEDHEALTH GROUP (UNH NYSE) We’ve owned United Health since May 2017 and recently added to the position in August 2019.

United is the largest health insurer in the U.S., covering some 70 million lives. In addition to leading brand recognition, the company also stands to benefit from significant positive macro tailwinds that are expected to occur over the medium term. It has diversified operations and the acquisition of pharmacy benefits managers provides a unique competitive positioning. We continue to hold approximately 10-per-cent weight towards the sub-sector, split between United Health and Anthem Inc.

Recent commentary from Democratic presidential candidate Bernie Sanders suggested that under his plan, there would be no need for private insurance companies. We view this as an opportunity, as valuation multiples have moved into very attractive levels. We think this is a core business for the U.S. healthcare system no matter the outcome of the election.

STRYKER (SYK NYSE) We initiated a position in January in 2017 at around $120. We recently added below $200.

Stryker is a high-quality large-cap medtech company that has a proven history of good execution. They have one of the fastest growth profiles in the large-cap medtech universe, solid balance sheet flexibility and a diversified business. There continues to be positive sentiment towards robotic surgical equipment, an area where Stryker’s Mako system is an industry pioneer and leader.

The stock sold off recently due to a proposed acquisition of Wright Medical. We believe this represents an attractive entry opportunity, with the acquisition synergistically expanding their reach into new areas.


Pfizer historically has had numerous long-duration, low-growth assets that generate significant cash flow along with a low-growth consumer products business. Following several acquisitions, the company has built out a strong pipeline of late-stage products and a pathway to growth by spinning off the lower-growth businesses into joint ventures. The most recent transactions caused the stock to sell off, providing an entry point for those looking at the position over the medium term.

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