Healthcare stocks are being dragged lower by acute broader market weakness this year, among other factors, but the sector isn’t performing as poorly as the S&P 500.
Some of the related exchange traded funds confirm as much. For example, the Invesco S&P 500 Equal Weight Health Care ETF (RYH) is beating the S&P 500 by roughly 500 basis points year-to-date, and that’s saying something because equal-weight ETFs tilt toward smaller stocks, and small-cap healthcare names are among the most repudiated in the sector today.
Notably, some compelling healthcare names are trading at more attractive valuations thanks to 2022 market declines. That group includes not only companies with durable competitive advantages, but some RYH components as well.
“The strongest long-term opportunity for healthcare companies primarily falls in three industries: drug manufacturing, medical devices, and diagnostics and research,” wrote Morningstar analyst Benjamin Slupecki. “And nearly all of the best healthcare companies to invest in—20 of the 21 companies on our list—have intangible assets that provide a wide moat against competitors. This intangible-asset advantage is often derived from either patents or proprietary technology.”
To the point about value, roughly a third of RYH’s components are classified as value stocks, but that doesn’t imply that the fund isn’t adequately positioned for a potential growth rebound. Nearly 30% of its member firms are classified as growth stocks.
Another point in RYH’s favor is that many of its holdings check the wide moat box — one of the pillars of which is intangible assets. And there’s still more.
“Eight of the 20 companies with a moat driven by intangible assets have an additional moat source, either a cost advantage or high switching costs,” added Slupecki.
The medical devices space is a credible option for investors seeking companies with rich intangible assets and cost advantages. RYH allocates 45% of its weight to healthcare equipment manufacturers and makers of life sciences tools.
“Medical devices, for their part, have high switching costs because surgeons develop expertise in using a differentiated set of tools and device systems have component parts that are designed to work together,” noted Slupecki.
Medtronic (NYSE:MDT), Stryker (NYSE:SYK), and Zimmer Biomet Holdings (NYSE:ZBH) — all of which have strong intangible assets — are members of the RYH portfolio. Several RYH member firms from the medical diagnostics industry enjoy intangible assets and switching costs advantages, according to Morningstar.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.