Opinion: There are three reasons why health care is the best sector in the market today. These eight actions are the most worry-free.

You are tempted to increase exposure to equities due to the strength of the market. But you are still gun shy due to the painful clearance. In addition, he is worried about a recession.

To do? Buy health stocks.

They have many defensive characteristics that help them weather recessions and at the end of business cycles. But they also generate a lot of growth.

“Health care is our top sector amid increased macroeconomic uncertainty,” says Bank of America strategist Savita Subramanian. “We believe the sector is well positioned amid the downside risks ahead.”

Here are three reasons why you should own the health care industry, and eight stocks and exchange-traded funds (ETFs) to consider.

1. They are like technology, but with less risk and better returns

Health care has posted the second-fastest earnings growth since 1986. Technology is No. 1. But technology is more volatile and more vulnerable to economic downturns. The technology also has more exposure to global supply chain issues. By contrast, healthcare stocks are less likely to stop performing or see sharp declines in earnings growth. Health care pays higher dividends supported by strong balance sheets and cash flow, supporting the group’s defensive characteristics. The Select Health Care Sector SPDR XLV,
-0.36%
exchange-traded fund pays a dividend yield of 1.48%.

2. Reliable demand growth

People are less likely to cut back on medications when their budgets shrink due to inflation. Otherwise, inflation is less of an issue for health care, since insurers or the government mostly reimburse pharmaceuticals and procedures. This protects consumers from rising prices. And more people will need drugs and medical devices. That’s because there’s a good demographic tailwind in the aging population. The 65+ age group will grow 50% over the next 20 years, says Bank of America. People spend more on health care as they age, of course.

3. A better regulatory environment ahead

Betting markets are good predictors of choices. Right now we’re being told that Republicans are likely to take control of both the House and Senate this fall. I’m apolitical, but if the odds are right, the odds of drug price control reform in Washington, DC will be slimmed down. This will remove excess weight from the industry.

Stocks

big pharma: During the 2008-2010 recession and its aftermath, all health care sectors outperformed the S&P 500 SPX,
-0.67%.
But the pharmaceutical industry outperformed most. That suggests that this is the part of medical care for overweight.

But what actions? I like to look at the Baker Bros. Advisors holdings for biopharmaceutical ideas, as they are among the best in the field. So I followed his Seagen SGEN holding company,
+0.71%
since I suggested it in my stock letter (link is in my bio below) in February 2011 at $15. The stock is now trading at $177. But it still looks attractive.

For one thing, it’s Baker Bros. top holding, at 38% of its portfolio. That is a remarkable portfolio concentration, indicating a high level of confidence. Next, there is the possibility that Merck MRK will buy Seagen,
-1.04%,
according to the Wall Street Journal. If not, your business is fine. Seagen has a portfolio of antibody-drug conjugates that improve the potency and safety of anticancer drugs by targeting them to tumors, with more variations of this on the way.

Two biopharmaceutical companies to watch out for because they seem relatively cheap are BioMarin Pharmaceutical BMRN,
+1.50%
and Biogen BIIB,
-0.05%.
Both earn a four-star rating (out of five) on Morningstar Direct. This tells us that the stock is trading well below its fair value, as calculated by Morningstar Direct.

BioMarin has a portfolio of therapies for rare genetic diseases such as mucopolysaccharidosis, a lack of enzymes needed to process sugars, which affects one in 25,000 people born. But BioMarin therapies also treat more common ailments like phenylketonuria, a metabolic disorder. Many more therapies like these are stacked in the pipeline, including late-stage developmental therapies for genetic disorders like dwarfism and hemophilia.

Biogen’s second-quarter sales fell 5% due to generic competition from blockbusters like Tecfidera for multiple sclerosis. But Biogen’s portfolio of projects may soon bring good news. The company is due to report Phase III data this fall for its Lecanemab Alzheimer’s therapy. It also has several therapies for neurological disorders on the way.

For more traditional pharmaceutical names, consider Bristol-Myers Squibb BMY,
-0.46%
and Merck. Both are selling at a discount due to concerns about patent expiration, says Bruce Kaser of Cabot’s undervalued stock adviser.

For Bristol-Meyers, investors are concerned about patents for the myeloma therapy Revlimid this year, and the cancer therapy Opdivo and the blood thinner Eliquis in 2026. At Merck, they are concerned about the loss of patent protection for the therapy. for diabetes Januvia. next year, and the cancer drug Keytruda in 2028.

In both cases, the fears are overblown, Kaser argues. Bristol-Myers has a strong product portfolio and is also developing its product line and portfolio through acquisitions. As for Merck, Keytruda’s patent expiration in 2028 is still a long way off. And like Bristol-Meyers, it will likely use its strong balance sheet to support acquisitions.

medical technology: These are medical device companies that sell things like joint replacements, implants, pacemakers, and insulin pumps. During the recession of the Great Financial Crisis, medical technology companies continued to increase their sales and profits. In 2009, medtech revenues and profits grew 3.8% and 8% on average, says Bank of America.

In the short term, the demand for its products should increase more than usual. That’s because people delayed procedures during the pandemic out of concern about going to hospitals. Now the paperwork is being done.

One to consider is Zimmer Biomet ZBH,
+3.92%.
It is the great player in joint reconstruction. Thus, he benefits from the aging baby boomer population, rising obesity, and the post-Covid rebound effect, as many joint replacement procedures were delayed in the last two years.

life science tools: These are the “arms dealers” of biopharmaceutical companies and universities in drug development research. They offer some security because about 75% of their sales come from recurring revenue, Bank of America says. “This suggests more predictable cash flows,” says the bank.

Bank of America highlights Thermo Fisher Scientific TMO,
-0.60%.
It benefits from Covid because it offers tests. But its scientific instrument, consumable and contract research businesses are also strong. “Organic” revenue (excluding acquisitions) grew an impressive 13% in the second quarter. Now that Covid restrictions have been lifted, biopharmaceutical research is set to pick up again, a source of short-term growth. The company is also growing through acquisitions, the most recent being the big December purchase of a clinical research services company called PPD for $16 billion.

Also consider Medpace Holdings MEDP,
-3.12%
due to the strong internal buy signal. CEO and founder August Troendle bought $4.4 million worth of shares in July, even though he already owned more than six million shares. Like Thermo Fisher Scientific, Medpace provides clinical research services to biotech companies, particularly smaller ones. But Medpace is growing much faster. Sales grew 27.7% in the second quarter.

Medpace shares are already up a lot from the CEO’s July purchase price of $145. The shares recently sold for $169. But experts, particularly founders, don’t buy short-term. And the stock is still trading well below the $231 it was trading at in November when the current selloff and bear market began. I also prefer founder-led companies because they often do better.

Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any of the stocks mentioned in this column. Brush has suggested SGEN, MRK, BMRN, BIIB, BMY and ZBH in his stock bulletin, Review the actions. Follow him on Twitter @mbrushstocks.

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