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76 million baby boomers began to cross the age of 65 around 2010, who control over 80% of personal financial assets and are responsible for half of all consumer spending. Baby boomers buy 77% of all prescription drugs and 61% of over-the-counter drugs. A more detailed report on U.S. demographics and baby boomers can be read in my last article of "The Real Threat for Investors: U.S. Population." From this strong trend of aging baby boomers, we predict the demand for healthcare products and services to increase in the next two decades, as baby boomers enter post-retirement age.

As reported by Nadia Kounang from CNN, the number of drug shortages has increased nearly 300% since 2005, according to the Food and Drug Administration. More than half of the drugs on the shortage list are considered critical, meaning they have no alternative. Until federal regulators can bolster the supply chain without compromising quality, we can't be assured of reliable access to safe medicines, as reported from Bloomberg view.

With the increasing demand, regulated supply, and drug shortage, it is a good time for long-term investors to review the opportunities in the healthcare sector to capture these growing trends. Furthermore, with the global economic slowdown, healthcare sector has inherited defensive nature and healthcare stocks are great holdings for conservative, cash flow portfolio. 3 solid stocks with strong fundamentals and consistent cash flow in the healthcare sector were reviewed and published on Seeking Alpha recently and will be summarized below.

  1. Teva Pharmaceutical Industries (TEVA)
  2. Johnson & Johnson (JNJ)
  3. Novartis AG ADR (NVS)

Teva Pharmaceutical Industries

TEVA is world's largest generic pharmaceutical manufacturer with operations in 60 countries. TEVA develops, produces and markets generic drugs in all treatment categories. TEVA's global low-cost operations, expansion to emerging markets, strong generic manufacturing capabilities, and drug pipeline should enable the company to grow profitably and continuously in the long term while benefiting nicely with the aging baby boomer trend.

While TEVA's revenue and EPS growth of 18.2 and 58.2 all outpace the industry averages of 13.7 and 22.7 and operating margin and net margin all produce the stronger numbers than the averages, we believe TEVA is currently under-valued with P/E and P/B of 11.4 and 1.6, compared with the averages of 25.2 and 2.8. Moreover, TEVA's debt/equity of 0.6, compared with the average of 3.1, gives us comfortable support to believe that TEVA had positioned itself well for any upcoming economic uncertainty.

A credit put spread is reviewed for Jan 19, 2013 $37.5/$35 for the maximum potential return of 15.74% for the margin used, for an investing period of less than 3 months. Full review can be read here in the article of "Drug Shortage, Aging Baby Boomers Create A Great Opportunity For Teva."

Johnson & Johnson

Johnson & Johnson is the world's largest and most diverse healthcare company, which includes three divisions: pharmaceutical, medical devices and diagnostics, and consumer. JNJ's primary focus has been on products related to human health and well-being and JNJ stands alone as a leader across the major healthcare industries by maintaining a diverse revenue base, a robust research pipeline, and exceptional cash flow generation, which together create a wide economic moat.

While JNJ's 3-year average revenue and EPS growth are both lower than the industry average, its operating margin of 24.6% and net margin of 13.5% should give investors strong confidence in its operation and management. Despite JNJ's higher valuation with higher P/E and P/B of 22.6 and 3.2, compared with the industry average of 17.0 and 2.8, it can be reasonably justified with JNJ's diversified product lines and solid cash flow and balance sheet, highlighted by its 0.2 debt/equity comparing with the industry average of 6.0.

A credit put spread is reviewed for Jan 19, 2013 Put $67.5/$65 for the maximum potential return of 15.74% for the margin used for an investing period of less than 3 months. Full setup can be reviewed here in the article of "Johnson & Johnson: Buying This Cash Cow With 4.8% Discount Through Options."

Novartis AG ADR

Novartis AG ADR, based in Basel, Switzerland, provides healthcare solutions through researching, developing, manufacturing and marketing of a range of healthcare products led by pharmaceuticals. NVS has five main operating segments: branded pharmaceuticals, generic pharmaceuticals (through Sandoz), diagnostic and vaccines, eye care (through Alcon), and consumer health products. NVS enjoys a wide economic moat through strong intellectual property combined with an abundance of late pipeline products. NVS' near-term growth was impacted by patent loss on Diovan and manufacturing problems in the consumer division. However, the company's strong strategic position will support a steady long-term growth and it might be a good time for long-term investors to review this buying opportunity.

From the fundamental perspective, with its current P/E of 17.2 and P/B of 2.3, as compared with the average of 17.0 and 2.8 in the drug manufacturer industry, NVS is currently fair valued. While the operating margin of 17.6% and the net margin of 14.8% are lower than the averages of 22.7% and 16.0%, we are optimistic about its revenue growth (3-year average) of 11.7, comparing with the average of 6.9. NVS' debt/equity of 0.2, comparing with the average of 6.0, along with its strong free cash flow, is providing strong support for its dividend yield of 4.08% at the current price of $60.84.

A credit put spread is reviewed for Jan 19, 2013 Put $57.5/$52.5 for the maximum potential return of 9.89% for the margin used for an investing period of less than 3 months. Full reading can be accessed here in the article, "Novartis AG: Establish Long-Term Positions With 6.23% Discount Through Options."

There are many other great companies in the healthcare sector, such as Pfizer Inc. (PFE), Abbott Laboratories (ABT), and many others. We will continue to review and follow up with these great companies as the trend of aging baby boomers continues.

Source: 3 Solid Healthcare Stocks To Ride The Baby Boomer Trend Through Options