Spread Betting by Vince Stanzione

Despite recent concerns about the effect of public spending cuts, the fundamentals of the healthcare sector remain strong

Regular readers will know that for the past few years I have been a big fan of investing in companies that are not good for your health such as tobacco, alcoholic beverages and fast food, which have all done very well. This month, I want to look at a sector that has been lagging but is showing some signs of life, and that’s the healthcare sector.

This sector has been out of favour on concerns of government spending cuts, and in the US the Obama Healthcare bill has also hit healthcare providers, but the truth is that spending on healthcare worldwide will still continue to grow. And with an ageing population, this is a sector we need to have some exposure to. The areas that I am mainly interested in are healthcare providers, healthcare equipment and life sciences tools and services.

Companies that fall into this category include Quest Diagnostics (NYSE:DGX), St Jude Medical (NYSE:SJT), Medtronic (MDT), Humana (NYSE:HUM), Cardinal Health (NYSE:CAH) and Express Scripts (NNM: ESRX)

Exposure via ETF
The best way to get exposure is a little known ETF called Powershares Dynamic Healthcare (NYSE:PTH). This ETF has 60 stocks in it with 44 per cent exposure to healthcare providers and services, 20 per cent healthcare equipment supplies, 16 per cent pharmaceuticals and 11 per cent biotechnology. Two of the heavyweights that are in this ETF are Baxter International (NYSE:BAX) and Abbott Labs (NYSE: ABT), both of which can easily be traded via a spread bet.

Baxter develops, manufactures and markets products that save and sustain the lives of people with haemophilia, immune disorders, infectious diseases, kidney disease, trauma and other chronic and acute medical conditions. The company retains a strong product pipeline, with several products in late-stage clinical development.
Among other factors, the company has a large cash balance ($4.60 per share), strong operating cash flow and backup lines of credit providing ample liquidity. The stock is currently at $53 (yielding 2.3 per cent) and I see it steadily moving up to $65 and view it as a fairly defensive stock to hold over what could be a rough summer in the stock market.

Neglected stock
Another stock that is not getting much attention is Abbott Laboratories (ABT).

Abbott is a leading global healthcare company developing, manufacturing and marketing products in: pharmaceuticals (estimated 57 per cent of revenues); medical devices (11 per cent); diagnostics (11 per cent); and nutritional products (16 per cent).

Last August, management announced the acquisition of India’s Piramal healthcare solutions business, catapulting Abbott to the no. 1 pharmaceutical player in the $8 billion Indian pharmaceutical market, where I see plenty of growth potential.

Abbott’s best-selling product is Humira, which posted global sales of $6.5 billion last year. It is approved to treat several serious immune system disorders, including rheumatoid arthritis and Crohn’s disease.

A recent positive (24 Feb 2011) is that a court ruling for patent infringement (for over $1.6 billion) by Johnson & Johnson’s Centocor unit has been overturned by the Federal Appeals Court. While J&J could try to re-appeal, the case looks weak. At the current $48, Abbott pays a good dividend yield of 3.9 per cent and I see the shares moving back above $56 by year-end.

The best known healthcare ETF is the SPDR Healthcare (NYSE:XLV) but this has a heavy weighting (50 per cent) to pharmaceuticals, with J&J (14 per cent), Pfizer (11 per cent) and Merck (9 per cent) being the top three holdings.
It’s always important when investing in an ETF to download the factsheets available on the issuer’s sites and check which stocks make up the index and what weightings are given to each stock.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds. For more details visit www.fintrader.net