“Safety” is still a feature many Americans seek out when looking for investment ideas. Yes, the U.S. economy remains strong, with second-quarter gross domestic product (GDP) topping expectations at 2.4% in the latest report. And of course, while inflation is still higher than the Federal Reserve's goal of 2%, it's cooled significantly, and is now up just 3% year-over-year, according to the Bureau of Labor Statistics.
Despite this good news, cause for investor caution remains, as interest rates are at a 22-year high. The benchmark rate now stands between 5.25% and 5.5% after the most recent hike by the Federal Reserve. In this environment, there is still reason to seek out “safe haven” assets to protect against future volatility.
And make no mistake, there's still some uncertainty that could spark additional volatility, even with the S&P 500 Index ($SPX) enjoying a strong 2023 - such as the prospect of another Fed rate hike this year, which is still on the table. As a result, many investors are still looking for relatively safe places to park cash.
Why healthcare stocks?
Some sectors are considered “safe” for investors, even during times of economic contraction, because they provide goods or services that people in general will always need (think utilities, pharmaceuticals, and the aptly named consumer staples).
Healthcare is another service that's always in demand, which is why healthcare stocks can be viewed as safe-haven investments during times of market volatility. Beyond the stability offered through their current operations, these names also provide opportunities for growth through acquisitions and new product development.
But first, let's look at that stability. Like other “safe havens,” the healthcare sector in general remains fairly insensitive to economic fluctuations. So if the economy does indeed slow down in the near future, demand for healthcare services is unlikely to decline as a result.
More growth to come
Healthcare stocks offer more than just stability in today's market, however. The sector is large and diverse, and it's going through a period of rapid innovation. Advances in gene therapy, personalized medicine, and even artificial intelligence have all created the potential to revolutionize the healthcare industry. This can create growth opportunities for investors, while also keeping their investment relatively safe compared to more speculative growth sectors.
Other fundamental drivers for healthcare include an aging population, along with the increase in chronic diseases. With $1.1 trillion spent on direct costs of chronic diseases in 2016 alone, this is certainly an area where investors could “follow the money” and find healthcare stocks dealing directly with these issues.
Of course, healthcare stocks aren't completely immune to rising interest rates and inflation. For example, any companies looking to make an acquisition must consider that interest rates on loans would be higher right now. Furthermore, for those creating new products, higher inflation can create additional overhead costs for these healthcare companies to absorb.
Still, this current situation makes now a good time to consider adding exposure to healthcare stocks, as many offer a compelling combination of value and growth based on their fundamentals and future outlook. High inflation and interest rates don't last forever - and when these factors stabilize, the strongest healthcare names could be poised for serious acceleration in the next few years.
In fact, it's predicted that the global healthcare market could grow at an average annual rate of 5.4% between 2019 and 2028, according to Health Affairs, with healthcare spending hitting $6.2 trillion by 2028. That's up from to a growth rate of 4.5% between 2016 and 2018.
One healthcare stock on the rebound
If investors are looking to gain exposure to a diverse range of healthcare products through one stock, then UnitedHealth Group (UNH) is certainly worth considering. UNH is one of the largest healthcare companies in the world, with a strong track record of growth and profitability, and a stable future outlook, as well. It is also 1 of the 30 member in the Dow Jones Industrial Average ($DOWI).
The company has several segments, ranging from health benefits plans and care management to retail pharmacy programs. These areas in particular are primed for more growth. The opportunity for UnitedHealth stock to expand its healthcare benefits coverage globally is substantial, while care and services programs should continue to grow alongside demand from an aging population, and among those with chronic health conditions.
Nevertheless, the stock is undervalued based on several factors. UnitedHealth stock trades at 22.58 times earnings, which is on par with its five-year price-to-earnings (P/E) ratio average of 22.36, as of this writing. Further, it trades at 1.36 times sales, again on par with its five-year average price-to-sales (P/S) ratio.
However, its enterprise value compared to earnings before interest and taxes (EV/EBIT) offers immense value at 14.35. This metric is finally in value territory after remaining around 59 EV/EBIT over the last year or so. This shows that perhaps investors aren't paying what this company is really worth, compared to what it's earning.
There are other signs that UnitedHealth stock is a buy as well, such as the company's recent earnings report. On July 14, UnitedHealth reported revenue that increased 16% year-over-year to $92.9 billion, with earnings per share at $5.82. Cash flow from operations hit $11 billion, and earnings from operations rose 13% from the same time last year. Management pointed to its diverse operations for the strong results, which led to the strengthening of its full-year net earnings outlook of between $23.45 and $23.75.
Overall, analysts are also bullish on UNH: 17 rate UNH a “strong buy,” 2 a “moderate buy,” and only 2 of them rate it a “hold.”
Even with all these reasons to buy, UnitedHealth stock is still down 4.5% year to date (YTD) - and that's even after a 5% jump in the share price earlier this month.
As this diversified healthcare stock continues to rebound, it may be an excellent time to buy shares of UNH, for both protection in today's unpredictable market environment and the prospect of future growth.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
