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:
The easiest way to play health care is to buy a diversified giant such as Johnson & Johnson (JNJ) which is diversified worldwide. Seventy percent of its revenue is from markets in which it is the No. 1 or No. 2 player.
Another way to increase one's healthcare allocation is to buy into big pharma through stocks such as Pfizer (PFE) or Merck (MRK). If you're afraid of patent expirations, go for a generic-drug maker such as Teva Pharmaceutical (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 (DGX) and LabCorp (LH) taking just over 20% market share.
Option No. 2: Healthcare services
UnitedHealth Group (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) |
Europe Proof Stocks -- Total of $10K invested equally in each stock
Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
