Six stocks for the long run

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: James Spence, managing partner, Cerno Capital.

In an endemically low-growth world, prone to forces of disruption, it has become progressively harder to identify stocks to hold for the very long run. There is, though, a group of superficially boring healthcare stocks that’s locked into long-term growth trends. Our ageing populations will increasingly require palliative care, or treatments for chronic illnesses. These companies are all set to benefit.

The ones we like have understandable products and services operating in large and growing markets. They typically operate in oligopolies, where the competitive environment is relatively benign, where they are able to maintain stable market shares through high barriers to entry, high switching costs (it costs more money than it’s worth to change products) and superior intellectual property.

They should, therefore, be able to sustain high margins for an extended period. These stocks should feature in a long-term investment portfolio. We avoid complex and intangible businesses with high valuations and no proven ability to generate cash – many of the new biotechs, for example.

Zimmer Biomet (New York: ZBH) is an American-based firm that designs, manufactures and markets orthopaedics equipment globally, treating problems frequently encountered by the elderly. The company is a leader in hip and knee replacements, which makes up more than two-thirds of its business; the residual business lines are for orthopaedic and dental reconstructive implants, trauma products and spinal implants.

Sonova (Geneva: SOON), a Swiss-based leader in hearing therapies, controls a quarter of its market. Research suggests that the prevalence of hearing loss among the over-65s is five times higher than for those below this age, but lifestyle changes in urban areas with high noise pollution means its market is expanding.

Coloplast (Copenhagen: COLOB) is another medical devices firm offering products and services for ostomy, incontinence, urology, and wound care, with the first two making up its core business (more than 75% of revenue). It operates globally, with a bias towards Europe, where it has a dominant position, holding 30%-40% market share in its core business.

Novo Nordisk (Copenhagen: NOVOB) and Fresenius Medical Care (Frankfurt: FME) have proven profitability and growth prospects, with a vast and expanding patient pool (between 8%-10% of the global population). Novo Nordisk supplies insulin and related treatments to diabetes sufferers, a medical condition that affects more than 380 million people.

The disease is on the rise due to Western lifestyles. Fresenius is a specialist in renal dialysis. It treats about 300,000 patients through its network of 3,300 dialysis clinics across the world. It has a 12% market share.

Finally, Johnson & Johnson (New York: JNJ) is a large multinational pharmaceutical (45% of sales), medical devices (35%) and consumer goods (20%) conglomerate, with 250 operating divisions globally. The company is recognised among consumers for its household brands, but the real breadwinner in the business lies in the laboratories and operating rooms. This is where the company dedicates its vast research and development resources to address a range of unmet needs.

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