Three stocks to buy for healthy long-term growth
A professional investor tells us where he’d put his money. This week: Ketan Patel, manager of the Amity UK fund at EdenTree Investment Management
The race to develop a commercial vaccine for Covid-19 has brought the healthcare industry into sharp focus. It is a highly diverse and rich area of the market for all types of investors. A growing global population, which is both ageing and ailing, remains a highly supportive long-term backdrop for the sector. The rise of the middle class in emerging markets is another tailwind, with more patients able to afford healthcare. Changes in their dietary habits, meanwhile, will lead to an increase in chronic conditions such as diabetes, autoimmune and cardiovascular diseases.
A sector to suit all investors
The depth and breadth offered by the global healthcare industry is second to none. It includes well-established multinational companies operating in drug research and development, life sciences, diagnostics, distribution, medical technology and animal health. Moreover, the mix of quality, defensive and growth stocks in the healthcare industry should appeal to all types of investors.
The medical-technology subsector contains well-established groups such as Smith & Nephew, which have built high-quality businesses capable of delivering long-term earnings growth. The search for companies that can deliver year on year, so-called compounders, is the Holy Grail for investors with a long-term investment horizon.
In the mid- and small-cap segments, well-positioned businesses with material exposure to the diagnostics and life sciences sectors include Bioventix, Clinigen, IP Group, Smiths Group, Oxford Instruments and Spectris.
Solid blue-chip income
Meanwhile, the large-cap pharmaceutical research and development (R&D) giants, such as GlaxoSmithKline, have defensive business models with low leverage, high margins, strong cash-flow generation and sustainable income. It is no surprise that this sector has stood up well during the coronavirus pandemic. What’s more, there has not been a dividend cut in this part of the market for more than two decades (excluding mergers and acquisitions). This remains a big draw at a time when the global dividend landscape has been fractured by cuts, suspensions, cancellations and deferrals.
Large-cap growth opportunities
There are also growth opportunities in the large-cap segment, with the likes of AstraZeneca offering highly attractive earnings growth for investors. Long-term investors in AstraZeneca have been well compensated: it has become the most valuable company in the FTSE 100, closely followed by GlaxoSmithKline. Within animal health, a sector forecast to grow by a third to $44bn by 2024, market-leading companies such as Genus and Dechra Pharmaceuticals are set to deliver double-digit earnings growth.
GlaxoSmithKline (LSE: GSK), AstraZeneca (LSE: AZN) and Smith & Nephew (LSE: SN) are global leaders in their areas and have developed business models with low leverage and high margins, which leads to excellent free cash flow over an extended period of time. Driven by long-cycle macro trends, all three firms look set to continue to deliver for long-term investors – regardless of the macroeconomic environment.