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We know that stocks are in for a torrid time over the next few years. Perhaps with the focus on the euro, markets that were once closely correlated (for example, Europe and the U.S.) may see some diversification in behavior that would encourage one to think a little differently.

In search of ideas for stock selections that will stand the test of time, we tap into an idea put forth by Paul Chi of the Motley Fool. He suggests that healthcare is a good defensive sector and, in addition, to consider buying companies that focus on the U.S. market.

He offers three alternatives:

  1. The easiest way to play health care is to buy a diversified giant such as Johnson & Johnson (NYSE:JNJ) which is diversified worldwide. Seventy percent of its revenue is from markets in which it is the No. 1 or No. 2 player.

  2. Another way to increase one's healthcare allocation is to buy into big pharma through stocks such as Pfizer (NYSE:PFE) or Merck (NYSE:MRK). If you're afraid of patent expirations, go for a generic-drug maker such as Teva Pharmaceutical (NYSE:TEVA).

These two suffer from having European exposure, so he looks at companies in the healthcare sector with no European exposure.

  • Option No. 1: Lab testing

Quest Diagnostics (NYSE:DGX) and LabCorp (NYSE:LH) taking just over 20% market share.

  • Option No. 2: Healthcare services

UnitedHealth Group (NYSE:UNH), a diversified health and well-being company. In addition to being the largest health insurer in the U.S., it provides other services such as health management services, technology and database management.

What to do?

We are going to put together a portfolio comprising:

  • Johnson & Johnson

  • Teva

  • Quest Diagnostics

  • LabCorp

  • UnitedHealth

We will see how they measure up to our dividend ETF benchmark and we will also look to see how they do in comparison with each other. We will see if Johnson & Johnson's management can mitigate European risk and benefit from broader diversification.

Asset

Fund in this portfolio

REAL ESTATE

ICF (iShares Cohen & Steers Realty Majors)

CASH

CASH

FIXED INCOME

TIP (iShares Barclays TIPS Bond)

Emerging Market

VWO (Vanguard Emerging Markets Stock ETF)

US EQUITY

DVY (iShares Dow Jones Select Dividend Index)

US EQUITY

VIG (Vanguard Dividend Appreciation ETF)

INTERNATIONAL EQUITY

IDV (iShares Dow Jones Intl Select Div Idx)

High Yield Bond

HYG (iShares iBoxx $ High Yield Corporate Bd)

INTERNATIONAL BONDS

EMB (iShares JPMorgan USD Emerg Markets Bond)

Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 1% 5% 9% 70% 8% 57%
Europe Proof Stocks 8% 38% 13% 64% 2% 7%
Retirement Income ETFs Strategic Asset Allocation Moderate -1% -4% 13% 80% 2% 6%

We can see that these stocks have fared better over the past one year as there will have been a move away from European stocks which would bolster others. Over the longer term, it performs similarly to the buy and hold portfolio, which is good performance for a less diversified set of equities.

Fund in this portfolio

Percentage

JNJ (Johnson Johnson)

13.18%

TEVA

11.42%

DGX (Quest Diagnostics)

28.75%

LH (Laboratory Corp)

12.54%

UNH (UnitedHealth Group)

34.11%

We can further see that the giants (Teva, Johnson & Johnson) are underperforming which supports the theory that being isolated from Europe has brought some benefits.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

Over the longer term, the performance is closer to the more diversified ETF portfolio.

The conclusion I draw from this is that healthcare is likely to be as close to recession-proof as possible, especially as the boomers age. I think that it is also reasonable conjecture that U.S.-based companies will likely fare better with there being a drift towards companies with less U.S. exposure.

This is an interesting selection and one worth considering.

Source: 5 Europe-Proof Stocks For Your Portfolio

Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.