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Giving your portfolio a checkup and some health care

In a sick market, health care investments can serve the same purpose as other defensive stocks, says this Canadian analyst, who picks three.

The market can’t get out of its sick bed.

There’s been a lot of talk over the past few months about the market pulling itself up from its November lows.

Now there’s been a relapse. Markets around the globe are careening back toward those lows. It is decidedly a sick feeling.

Worse, it’s an emergency. And Mr. Ken McCord believes he has the perfect prescription for your portfolio.

Before we push this medical metaphor to the point of nausea, let’s just say he means health care stocks.

Writing in The MoneyLetter, Mr. McCord, CEO and portfolio manager at Webb Asset Management thinks you should use health care firms much as you would utility, consumer or bank stocks (in their better days).

They’re classic defensive stocks in times of trouble.

He explains why and deals with the rather unusual situation Canadian investors find themselves in when it comes to health care stocks.

Not least, he recommends three very different investments that might put some colour back in your portfolio’s cheeks.

No more splurging

When the economy is in a descending spiral, very few people can escape its grip. Many companies cut back on spending, people are laid off and more layoffs are threatened.

The first victim is confidence. No more splurging on stuff you’d love to have, but don’t really need. Fewer vacations, fewer plasma screens and not quite as many clothes flying off the shelves.

The top three items of the family budget look like this — food, household necessities and medicine.

Aside from the normal vitamins, pills and band-aids lining medicine cabinets around the nation, there are all the medications for chronic conditions — high blood pressure, high cholesterol, arthritis and far too many others. As Mr. McCord points out, such medication is not something that can simply be cut from the budget. And with a population of aging baby boomers, there will be many more additions than subtractions to the list.

So health care is a necessity you can rely on. But finding the right stocks to take advantage of it is not a simple matter for Canadians.

Central nervous system disorders

Energy stocks, mineral stocks and financial stocks we’ve got plenty of in Canada. Health care stocks, not so many.

“Fortunately, those that are listed on our exchanges offer good opportunity for the interested investor,” says Mr. McCord.

The biggest of them all is Biovail Corporation (TSX-BVF). This company built its success on making existing drugs better, with its drug delivery technologies. In the broadest terms, this means administering the drug in such a way that its effectiveness is increased and extended.

Biovail produced three big winners in the field — Wellbutrin® for depression, Ultram® for chronic pain and Cardizem® for high blood pressure. All are in extended release formulas.

Now it has changed course. It is developing new pharmaceuticals in a specific area of need — central nervous system disorders. Specifically, it has targeted Huntingdon’s disease, Alzheimer’s and multiple sclerosis.

It is hardly necessary to underline the importance of treatments for these ailments. They add up to a $70 billion market around the globe.

Despite shareholder complaints about its new strategy, a visit from the securities regulators and market turmoil, Biovail has bounced from a low of $8 in October to over $14 today. It is a healthy stock in a sick market.

Real drug delivery

With its immense population and large private health care industry, the United States is a much richer source of health care stocks than Canada.

And since you can’t get enough diversification with Canadian health care stocks alone, you should add some from down south, says Mr. McCord. There are some large caps that look good at the moment, he says, like Baxter International (NYSE-BAX) and Abbott Laboratories (NYSE-ABT).

But the stock he really likes is another that relies on drug delivery, only in the more traditional sense. Express Scripts (NASDQ-ESRX) is a large pharmacy benefit firm with an $11.6 billion market cap.

Across the U.S. and Canada, it serves managed care organizations, insurance carriers, administrators, employers and union-sponsored benefit plans. The service this analyst singles out is RX Outreach, which is “a low-cost, mail-order prescription drug program service and is set to thrive in a recession.”

Lower-income consumers can receive a six-month supply of the prescription medicines they need at $20 a pop. They can pick from over 150 medications for conditions like high blood pressure, depression and diabetes.

The stock traded as high as $80 before the market finally got to it and pushed it down below $50 in October. It is moving back up now, to $56.16 yesterday.

Finally, if you’re not keen on owning single stocks in these fevered markets, you can always take an exchange-traded fund (ETF).

Mr. McCord’s recommendation is SPDR S&P Pharmaceuticals ETF (NYSE-XPH), which carries 25 names with an average market cap of US$26 billion. The actual S&P Pharmaceuticals Index is trading at 11 times forward earnings, while the earnings of its constituents are expected to grow 12.8 per cent per year for the next three years.

“It’s not too late to take a more defensive stance in your portfolio,” Mr. McCord tells his readers in The MoneyLetter, suggesting that things could get worse before they get better (as indeed they have).

Just because the market is ill doesn’t mean that your portfolio has to be a chronic sufferer.