By John Persinos
President Trump was impeached by the U.S. House of Representatives yesterday, making him only the third president in American history to bear that ignominious stain. His case now moves to a trial in the Senate.
The rancor exhibited during the House debate yesterday was ugly, reflecting a divided nation. Worried readers have been asking me: how will impeachment affect my investments? The short answer: not at all, unless you make emotional decisions.
If you're looking for a winning investment strategy in the Trump era, it's this: always expect the unexpected. Keep your eye not on the cable TV chyrons, but on the financial hard data. I think it's revealing that despite the high drama in Congress yesterday, stocks closed essentially flat.
In this tumultuous political climate, with media white noise all around us, you should invest your money in trends that are locked in.
Few trends are more powerful than global demand for health services. Populations around the world are aging and middle classes in emerging markets are getting more affluent. Global expenditures on doctors, hospitals and pharmaceuticals are all going in one direction: up.
An earnings growth champ...
According to the research firm FactSet, the projected year-over-year earnings growth rate for the S&P 500 in calendar year (CY) 2019 is 0.3%, which is below the 10-year average annual earnings growth rate of 9.1%. But as the following chart shows, the health care sector has been an earnings growth champion this year, at 8.3%.
Within the broader health care industry, all sub-sectors are predicted to report growth in earnings, led by providers and services (10%), equipment and supplies (9%), and life sciences, tools and services (9%).
I'm especially keen on tools and services. Medical care and drugs are expensive, which makes cost containment an imperative. Federal and state regulators increasingly mandate the use of information technology tools to digitize and analyze patient records, to make utilization more efficient.
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Specialized software firms in the medtech space enjoy high margins and competitive "moats." Research firm Evaluate estimates that the worldwide medtech industry will achieve a compound annual growth rate (CAGR) of 5.6% between now and 2024, to reach $595 billion in revenue.
Health sector earnings growth should remain on an upward trajectory in 2020 and beyond. Between this year and 2022, global health care spending is expected to rise 5.4% annually to exceed $10 trillion.
The U.S. is projected to spend $5.9 trillion on health care in 2027, up from $3.6 trillion last year and the highest amount of any developed country, according to a 2019 government report.
That's trillion, with a "T." We're talking about vast sums. Serving the political interests of health and drug companies is an army of Gucci-clad lobbyists. Sure, impeachment is historic. But for an industry of this size, it doesn't matter who sits in the Oval Office. Even so-called "populists" eventually get with the program.
The health services sector is a cash-generating machine that cranks out robust shareholder returns, year in and year out. Add a graying population and expanded government insurance to the equation and selective health stocks make solid bets. Many health stocks also pay generous dividends, which makes the sector appealing for growth and income investors alike.
Defensive growth for uncertain times…
The health care and drug industries tend to be resistant to the ups and downs of the economic cycle. The bull market and the economic recovery are getting long in the tooth. Even if the economy dips in 2020, people still need to address their ailments.
A catalyst for global growth among health and drug providers is a rising middle class in developing nations that's spending more money on their quality of life. Big Pharma, in particular, has established significant penetration in emerging markets. According to the research firm Evaluate, worldwide prescription drug sales are projected to reach a CAGR of 6.4% through 2024.
To ensure that you have a comfortable retirement, you need to find those investments that are poised to generate a steady stream of profits, not just for the next 12 months, but during the next 10-20 years. Turn to health services stocks for long-term wealth building.
To be sure, health care stocks have underperformed the broader market year to date. The benchmark exchange-traded fund, Health Care Select Sector SPDR ETF (XLV), has generated a total return of 19.3%, compared to 29.6% for the SPDR S&P 500 ETF Trust (SPY), as of market close Wednesday. But that's actually a good thing.
Unlike other defensive sectors that have been on a tear lately, you can still find reasonably priced health services equities, just as they're poised to take off in the new year.
Health and drug stocks have been under pressure this year, as Democratic candidates for president bash the industry for supposedly gouging the public.
However, the contours of the presidential race are likely to change in 2020, as the field narrows and Democrats soften their anti-business rhetoric to place greater focus on the impeached president. Investor fear of greater health services regulation will fade and stocks in the sector will start to live up to their inherent potential.
The major medical and drug providers typically enjoy strong cash flow, rock solid balance sheets, and long histories of earnings and revenue growth. They're "essential services" plays that are recession-resistant.
Health care stocks also provide a hedge against inflation. Underlying price pressures are increasing, amid costly tariffs and rising wages. Health care is one of the few economic segments where spending has risen faster than inflation. The time to invest in inflation hedges is now, before the threat becomes obvious and the herd bids up their prices.
There's also an alternative way to profit from the health services industry. It's an avenue you probably didn't expect, but it's a pipeline to assured Big Pharma payouts. These drug industry payouts could total a whopping $1.5 trillion. If you'd like to tap into this bonanza, click here for our special report.
John Persinos is the managing editor of Investing Daily. You can reach him at: mailbag@investingdaily.com
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