Tahoe Market Pulse: Winners in a slow-growth economy
For years I’ve given the “TINA” argument … There Is No Alternative to stocks in this near-zero interest rate environment.
Some are now arguing that TINA has pushed many of the dividend-paying stocks to unreasonable valuations and that if the economy doesn’t improve then some of the dividend increases that investors are expecting may not materialize.
Under this argument, they point to stocks like Coca Cola (KO), which is hitting new highs even as profits fall. Or utilities, which have been one of the best performing sectors over the last few years, including 2016.
Yes, one can make a case that utility valuations are stretched and they are vulnerable to profit taking when interest rates tick higher. But this doesn’t mean that all dividend payers are overvalued. In today’s slow-growth economy, pharmaceuticals are especially attractive.
Drug stocks have historically traded at a significant premium to the market, but not now. Consider Pfizer (PFE), which trades at just 14 times this year’s guidance, pays a good dividend, raises its payout each year, and has upside thanks to immuno-therapy and oncology drugs.
Having prospered by treating the chronic problems of high cholesterol and blood pressure, drug companies like Merck (MRK) and Bristol-Myers Squibb (BMY) are now focusing on cancer with so-called PD-1 Inhibitors to fight tumors using the body’s immune system.
The market for pharmaceuticals is growing as more people around the globe become middle class with rising incomes and standards of living. They’ll want consumer items, cars, clothes, the works, plus better, larger and more efficient homes.
They’ll also want better healthcare from a system already coping with aging populations here and abroad. The demographics favor top-quality drug and healthcare companies. Of course there is political risk, just as there is with insurance companies, banks, and Big Oil.
Investors can either buy the individual stocks with no cost of ownership, or they can buy an exchange-traded fund like iShares Pharmaceuticals (IHE) or SPDR Pharmaceuticals (XPH). Their management fees are 0.45% and 0.35% respectively.
Johnson & Johnson (JNJ) and Pfizer (PFE) are the two largest iShares holdings while the SPDR holds Zoetis Inc. (ZTS) and Bristol-Myers Squibb (BMY). Given today’s market environment, these should work out well.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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