The healthcare sector is often sleepy, but with this market turmoil, one area of safety could be not just the third quarter — but growth as well. The third quarter could be a turbulent period, after the worst first half for stocks since 1970. As investors fear rampant inflation and the heaviness of the Federal Reserve, they are looking for places that could still generate some gains and income. The strength of consistent dividends and the quality of dividend payouts for some healthcare companies may be a welcome hideout for investors. The broad healthcare sector is one of three investment ideas that analysts have chosen to outperform during the summer months. The others were bank and corporate stocks that generated a lot of free cash flow but were unpopular because investors were short selling them. According to the CFRA, the healthcare and biotech industry traditionally outperformed in the third quarter of a midterm year. Despite regulatory concerns, the sector has been an island in a typically windy quarter. This year, the S&P healthcare sector outperformed the S&P 500, which lost nearly 21% in the first half. In the same period, health care declined by only 9%. For the second quarter, the health care sector SPDR fund, which represents the S&P health care sector, fell 6.4%, while the S&P 500 fell 16.4%. Health care was, on a historical basis, the best performing major sector in the third quarter in years when there were midterm elections. Back in 1990, the sector itself rose 4.4% in those quarters, compared to the S&P 500’s average decline of 1.8%. CFRA data also shows that among the S&P sub-sectors, tobacco was the best performer, up 6.4% in the third quarter of the mid-term. But all the other positive sub-sectors were in the healthcare sector. This includes healthcare facilities, up 6%; medications, 5.1% increase; healthcare equipment, up 2.1%; Healthcare distributors, up 2%, and supplies, up 1.8%. Prepare for the third quarter Navigating the third quarter after the approximate start of 2022 Wall Street strategists see the stock market recover most of its losses at the end of the year. Stovall, CFRA’s chief investment strategist, identified some companies in the healthcare sub-sectors that investors might want to consider. They include HCA Holdings; Pfizer. Tandem diabetes care. Patterson Coss. Align Technology and Walgreens Boots Alliance. David Bianco, chief investment officer for the Americas at DWS Group, said he also sees opportunities in healthcare, which is the sector’s most weighty in the DWS Sector Strategy Fund. “We believe it is reasonable growth and is not in danger of rising interest rates,” he said. “This includes pharmaceuticals and biotechnology.” Biotech has been overrun with high-growth names, and both Stovall and Bianco say it’s time to take a look at them. The iShares Biotechnology ETF is moving away from its lowest level, but is still well below its 52-week high of $177.37 per share. Bianco said the names that are gaining weight in the biotech sector include Abbvie and Amgen. In the latest CNBC Deliving Alpha poll, 58% of investors said healthcare should be among the biggest winners at the end of 2022. CNBC polled nearly 500 senior investment officers, equity strategists, portfolio managers, and CNBC money-management contributors, in last week’s poll. Energy topped the list with 68% expecting it to be one of the top performers, and third was financial companies with 34% expecting the sector to perform very well. Banks are not the culprits this time Bianco is one of those who favor some financial institutions, and he expects bank stocks to do well later this year. He likes major banks JPMorgan, Wells Fargo, Bank of America and Citigroup as well as PNC Financial. “Its profitability is driven by short-term interest rates, not the shape of the yield curve,” Bianco said. He said that if there is a recession, it will not be because of the banks, unlike in 2008. “We don’t expect a credit crunch from this.” In addition to banks, he likes insurance companies, such as Chubb, Marsh & McLennan. When in doubt, look for cash flow Julian Emanuel, president of Evercore ISI Equities, Derivatives and Quantitative Strategy, said he looks across sectors for stocks with traits that can help them beat inflation and a weak economy, but also outperform. First, the companies have to generate a significant amount of free cash flow, and it has to be shares that are sold on a large scale. “Liquidity has been said to be a liability in a high inflation environment. Not only do we disagree, but we disagree strongly. We want stocks that get rid of a lot of liquidity, and we want stocks that people keep selling all the way through.” He said. Emmanuel created a list of companies that fit his criteria with a market capitalization of more than $5 billion. It also chose companies that did not hit a new low in June, unlike the S&P 500. The list included a mix of sectors. The energy names on the list were among the highest sources of free cash flow. For example, Occidental Petroleum is expected to have 25.5% free cash flow and Ovinitiv is expected to have 24.7%, according to Evercore estimates. Discretionary consumer names are also on the list. Dick’s Sporting Goods is estimated to have free cash flow at 16.3%, while luxury retailer Capri Holdings has 12.7%. Capri owns the Jimmy Choo and Michael Kors brands, among others. The list also includes Omega Healthcare, with an estimated free cash flow of 12.3%. REIT works with assisted living facilities.
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