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Why Are Health Care Companies Good Investments Today?

As the bull market continues to age, many investors are re-balancing their investment portfolios. Some are buying bonds as a way to invest without losing any money. These folks are willing to accept safety in return for giving up the opportunity for more profits if the market keeps going up. Others are staying in the market but looking for safe investment niches. One such relatively safe investment niche is health care. Why are health care companies good investments today?

Signs That a Correction Is Getting Closer

Stock traders watch the market for technical signals and long term investors look at stock fundamentals. But, sometimes the proof is right in front of us in our everyday lives.

An old friend of mine, a native of the country of Panama, tells a story. His father was a farmer and an observer of nature as well as human nature. He said that a person did not have to read the business pages to know if there was a recession on the way. All that was necessary was to look at the mango trees in the park across from the church on a Sunday morning.

When times are good, no one bothers to climb the trees in the park to pick the mango fruit. But, when there is less work and less money in everyone’s pockets, the mango trees are picked bare because people need to eat.

You do not have to live in Panama and look at mango trees. When another mall closes in your town it is not necessarily because of bad management. People are simply buying less. And, the result is that weaker businesses fail, followed by the next weaker, and their employees start looking for work, and taking jobs that pay less.

What Will People Still Buy When Times Are Difficult?

Health care companies are good investments today and always because people need their products and will buy them even when they cannot afford an IPod or need to cancel their Netflix subscription. Market Watch writes that the market is due for a hard landing and suggests health care companies as a safer investment option today.

Over the past 10 years it has not paid to be cautious. Low interest rates drove prices of almost all assets higher. Pricier assets made people feel wealthier and thus magically created economic growth. Low interest rates also pushed people into riskier assets, thus creating a mismatch between the assets people hold and their true risk affordability and appetite.

What is clear is that since interest rates are low and global economies are highly leveraged, central banks and governments will not have as much power to help.

This is one reason why my firm’s portfolio holds a lot of healthcare stocks. Healthcare companies have great balance sheets; their business is not cyclical (the demand for its products doesn’t fluctuate with the whims of the global economy); and there is a huge tailwind behind their backs in the form of the aging global population. Moreover, many of these stocks trade at highly attractive valuations.

Health care companies are not all the same. United Health Care is a health insurance company. Pfizer is a big pharmaceutical company that sells lots of medications that people need. Medtronic makes cardiac pacemakers and other equipment needed for health care. Johnson & Johnson sells everything from Band-Aids to advanced prescription medications. Johnson & Johnson was also mentioned in our article about investing without losing money. They and Microsoft are the only two US companies with AAA rated corporate bonds.

Health care companies are good investments today because they are not overpriced and have huge margins of safety with strong brand name products that will still sell when the economy weakens and the stock market corrects.

Why Are Health Care Companies Good Investments Today? PPT





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