A professional investor tells us where he’d put his money. This week: Andy Headley of Alliance Trust and Veritas Asset Management chooses three favourites.
Government rhetoric and policy have emerged as key issues that could affect companies over the coming years. Heated discussions among regulators and politicians in sectors such as technology and healthcare, and the policies that emerge as a result, could enforce real change. In US healthcare, for instance, political efforts to lower drug prices are not only hitting companies in the pharmaceutical sector but are also the driving force behind widespread changes further down the supply chain.
These supply-chain companies, however, should ultimately be able to fend off political upheaval and continue to benefit from the vital role they play in the provision of medicine. They are also engaging in mergers and acquisitions, which enable them to diversify into different areas of the healthcare system. They are currently cheap relative to the market, and once the issues are resolved they promise to play a fundamental role in helping provide a solution to the problems in US healthcare.
A pharmacy giant
CVS Health Corporation (NYSE: CVS) is a large US retail pharmacy and healthcare company with revenues of almost $185bn. The business recently acquired a large insurance company and has now become vertically integrated: it has control over whole sections of the sector’s supply chain, from insuring clients to managing the cost of medicines and supplying drugs to patients. As one of the largest pharmacy chains in the US, it has developed a system whereby the local pharmacy can become the first port of call for patients, offering huge cost savings for the whole health system. Its share price has struggled recently on the back of what many saw as disappointing earnings at the end of 2018, but its strategy should prove very successful in the long term.
Cigna set for success
Another big player in the US healthcare sector is Cigna (NYSE: CI), an insurer. Its offerings include medical, dental, disability, life and accident insurance. Like CVS, it has become vertically integrated, with input into various strands of the supply chain, and now has a position at the forefront of both insuring patients and acquiring medicines. Cigna is targeting earnings-per-share growth of between 10% and 13% over the next three years. We think US healthcare services delivery will eventually be dominated by four or five large vertically-integrated companies, with CVS and Cigna among them.
Technology titan has room to grow
The big US technology companies are also facing multiple government and regulatory interventions. But Microsoft’s (Nasdaq: MSFT) transformation in the past few years has seen it surpass even Apple in terms of market value. Its share price rallied strongly in 2018 as chief executive Satya Nadella’s strategy began to bear fruit.
The plan has involved a commitment to be more open as a company, to invest more in the cloud (online data centres)and to move to a subscription model, whereby customers typically pay a monthly fee for the group’s offerings. The refreshed direction is beginning to boost cash flow, even though it was only implemented four years ago, and bodes well for the years ahead.