Considering the elevated volatility in the market, we think that investors should be looking at relatively defensive sectors such as healthcare. JPMorgan's (JPM) Noelle V. Grainger published a report on December 9th. Below we discussed the top healthcare picks in each segment by JPMorgan.
Despite the adverse macro conditions, the biotechnology sector has had a consistent top-line performance. JPMorgan still recommends a selective approach due to macro and biotech industry concerns in 2012. The companies listed below have shown a defensive nature and are expected to perform well in the presence of beneficial catalysts.
Celgene (CELG) has solid underlying fundamentals and presence of meaningful potential catalysts makes it the best pick of the industry for 2012. JPMorgan foresees an increase in market penetration which will result in accelerated growth. The first-line maintenance filing in the EU is expected to be a beneficial catalyst for the company. Currently, its shares are trading at $62.21 and have traded within a range of $48.92 and $68.25 in the current year. JPMorgan expects the company to reach a target price of $75 in 2012. Celgene has market capitalization of $27.6 billion and its earnings per share of $2.80 may reach $4.20 by the next year’s end. Retiring fund manager Bill Miller had more than $150 million in CELG at the end of September.
SMid Biotechnology firms are not dependent on the overall economy, making them more resilient to macro uncertainties. Rather, clinical and regulatory catalysts, commercial performance, and potential M&A activity could prove to be risk-induced events for investors. Besides a change in M&A activity for 2012, attractive valuations and a robust IPO market will be beneficial outcomes for the investors in this industry.
Onyx Pharmaceuticals (ONXX) continues to be the preferred stock for 2012 with solid YTD performance. Expected approvals in 2012 along with long-term optimism will work in favor for Onyx. Current projects evaluating Nexavar and Regorafenib are expected to be catalysts for growth in 2012. Currently, the shares of Onyx are trading at $42.40 per share and have traded within a range of $27.17 and $46.07 in last 52 weeks. An expected target price of $48 may be achieved in 2012. The company has market capitalization of $2.7 billion and earnings per share of $0.13.
A number of factors, including a weak payor mix, budget cuts, and light medical consumption have resulted in an undervaluation of stocks. Healthcare facilities are expected to be highly levered to the recovery of the economy and it is basically about the payor mix. This is the ability to trade the disproportionate mix of government-support programs (being low-paying in nature) for higher paying commercial ones. The leverage to earnings from such shifts is likely to be enormous. Also, the health reform law is likely to be responsible for coverage expansions in 2014.
HCA Inc. (HCA), being the top stock pick in this sector, has been given an Overweight rating by JPMorgan. It is the largest U.S. hospital system with leading share in urban markets. Currently, its shares are trading at $23.24 per share and are expected to reach a target price of $38 by 2012. Shares have traded within a range of $17.03 to $35.37 over the last 52-weeks. Market capitalization is $10.14 billion while earnings per share of $2.93 are expected to reach $3.60 by the end of the year.
Healthcare Information Technology:
The Stimulus Bill of 2009 has benefitted a number of companies, including Athenahealth (ATHN), Cerner Corporation (CERN), MedAssets (MDAS), and Quality Systems (QSII). Also, the Health Reform is expected to cause growth in this sector with health information exchanges and technology being the major demand drivers.
Accretive Health (AH) is the top pick for 2012 in this market segment due to its unique business model which generates revenue through efficiency in the collection process. Also, Accretive Health’s Intermountain Healthcare deal is expected to bring brand recognition to the firm. Currently, its shares are traded at $23.00 per share and are expected to reach a target price of $35 by 2012. Over the last 52-weeks shares have traded between $13.20 and $32.82. Accretive Health has market capitalization of $2.26 and its current earnings per share of $0.24 are expected to triple by the end of 2012.
Life Sciences Tools & Diagnostics:
The next year will be a cautious one for investors due to a secular shift to lower growth and a slowdown in the industrial market. Companies which tend to discount macro conditions are going to be the likely picks for 2012. Also, emerging market growth may affect company fundamentals.
Agilent (A) has been given an Overweight rating because of its industry leading growth, beneficial geographic exposure, operational excellence, trustworthy management, and a controlled capital deployment. Since the stock is discounting a downturn, the risk may be beneficial to investors. Currently, its stock is valued at $36.98 per share and is expected to reach a target price of $53 in 2012. Over the last 52-weeks, the company’s shares have traded in the $28.67 to $55.33 range. Agilent’s market capitalization is $12.84 billion and has earnings per share of $2.95, which are expected to reach $3.44 by 2012.
The improvement in underwriting margin has resulted in an increase in earnings and a favorable spread for this market segment and the trend is expected to continue in 2012. The high competitive pricing has declined over the years, becoming more contained, but the uncertainty in the 2014 Health Reform coupled with pricing may turn out to be a “breaking” factor. However, JPMorgan does not foresee a significantly negative result for managed care. The review of the Health Reform by the Supreme Court in 2012 could also prove to stall performance in this sector.
UnitedHealth (UNH) is the top stock pick for 2012. United Health has market dominant positions and a rapidly growing business in less regulated health-related services. Currently, its shares are trading at $48.29 per share and have traded in the $34.94 to $53.50 range in the current year. JPMorgan expects UnitedHealth to reach a target price of $60 in 2012. Market capitalization is $51. 48 billion and earnings per share of $4.10 may reach $4.65 by the end of the year. Value investor Boykin Curry had more than $350 million in UNH at the end of the third quarter.
Medical Supply & Devices:
Industry growth rates have witnessed a slowdown and end markets have weakened due to structural as-well-as cyclical pressures. This trend is expected to continue in 2012 with earnings per share and revenue growing in single digits. Most stocks are relatively inexpensive and are responsible for an incremental cash flow to the company and shareholders.
St. Jude Medical (STJ) is the best pick for 2012 despite the contraction in the U.S. ICD market, resulting in a decline in revisions to Street estimates. However, JPMorgan expects St. Jude to have one of the best pipelines in the industry. With the approval of new products in the upcoming year, St. Jude is guaranteed entry into two new major markets which will be the key growth driver for next few years. Currently, its shares are trading at $36.95 per share and are expected to reach a target of $48 in 2012. Over the last 52-week range, its shares have traded between $33.54 and $54.18. St. Jude has a market capitalization of $11.79 billion and earnings per share of $3.27. Andreas Halvorsen’s Viking Global had more than $130 million in STJ at the end of September.