Joshua Riegelhaupt, PhD
Joshua Riegelhaupt, PhD, assistant manager of Baron Health Care Fund (BHCFX), New York City. The fund has annualized returns, since its 2018 inception, of 12.2% vs. 8.3% for the S&P 500. BaronFunds.com
Whether the stock market stumbles or surges in 2023, the healthiest bet may be health stocks. The sector has unique qualities that make it a defensive and offensive play, say top fund managers Neal Kaufman and Joshua Riegelhaupt, PhD. In last year’s bear market, the S&P 500 index’s health-care sector fell 2% versus 19% for the overall index. Reason: Consumers don’t cut back on health needs even in uncertain times. Now, Kaufman and Riegelhaupt say companies ranging from pharmaceutical giants and medical-device firms to biotechs and health insurers have substantial earnings growth potential because they’re tapping into secular trends that were created or reinforced by the pandemic.
Bottom Line Personal spoke to Kaufman and Riegelhaupt of the Baron Health Care Fund to find out which post-COVID trends look most attractive and the companies that are likely to be big winners.
The pandemic didn’t just affect the way we work and live. It accelerated existing long-term trends including the obesity and diabetes epidemics…and has given rise to new ones such as scientific breakthroughs in vaccines and health-care services in patients’ own homes.
To identify secular trends: Look for companies that can profit from that trend and have the following characteristics…
Durable competitive advantage, such as superior technology protected by intellectual property, know-how, clinical data and regulatory barriers.
Strong, experienced management.
Predictable and recurring revenue plus high and rising profit margins.
Trends worth following now and the stocks most likely to benefit…
Trend: Increased use of home health care. Market forces are shifting health care toward lower-cost sites of care, including at home. Technologies such as remote patient-monitoring are enabling this. In a McKinsey’s Consumer Health Insights survey, 16% of respondents aged 65 and older said they are more likely now than before the pandemic to receive home health services. Companies to invest in…
UnitedHealth Group (UNH). Half of this managed-care giant’s business comes from its Optum division, which focuses on home- and community-based care. Optum has a large roster of physicians, clinics and ambulatory surgery centers. Last year, it acquired LHC Group, which provides more than 12 million in-home interventions annually. UnitedHealth Group grew earnings per share 17% year-over-year in 2022, and its business model should allow it to continue to grow earnings per share at a double-digit pace. Note: UnitedHealth Group is the largest holding in the Baron Health Care Fund. Recent share price: $463.68.
Dexcom (DXCM). The medical-device company offers a continuous glucose-monitoring system for people with diabetes that eliminates the need for finger sticks. The system sends blood glucose readouts to users’ and caregivers’ smartphones. It also warns of dangerous blood sugar levels. The technology enables people with diabetes to maintain their blood glucose in a tightly controlled range, reducing long-term complications. Recent share price: $110.67.
Trend: Escalating obesity. According to an American Psychological Association survey, 42% of Americans said they had gained more weight than intended since the COVID-19 crisis started. Obesity is a chronic disease that does not receive the same standard of care as other conditions, despite increasing risk for hypertension, heart disease and cancer. Company to invest in…
Eli Lilly and Co. (LLY). Last year, the FDA granted Eli Lilly “fast track” designation for approval of its diabetes drug tirzepatide (Mounjaro) as an obesity treatment. Clinical trials have been compelling—the company reported that patients lost 22.5% of their body weight, on average, or about 52 pounds. Tirzepatide could be a blockbuster, with billions of dollars in potential annual sales. Recent share price: $324.37.
Trend: Spending on pets. The American Society for the Prevention of Cruelty to Animals released data showing that 23 million households acquired a pet during the pandemic. Compared with drug development for humans, development for pets has lower regulatory barriers, requires less costly R&D and faces less generic competition, and the market is self-pay, which reduces third-party reimbursement risks. Company to invest in…
Zoetis (ZTS) makes vaccines, diagnostic products and medicines for pets and livestock. Its stock declined last year due to veterinary workforce challenges, unfavorable currency exchange rates and global supply constraints. But it should rebound over the long term, driven by franchises in dermatology, parasiticides and pain. Recent share price: $163.41.
Trend: mRNA biotechnology. Messenger ribonucleic acid (mRNA) is a genetic material that instructs cells to produce proteins that can educate our immune system to produce antibodies. mRNA allowed companies to develop COVID vaccines cost-effectively. The technology can be used to develop many kinds of vaccines. Company to invest in…
Moderna (MRNA). After triple-digit stock returns in 2020 and 2021, this leader in mRNA-based vaccines and therapeutics pulled back 24% last year. Reason: Uncertainty about what the booster-shot market could look like as COVID shifts away from pandemic status. Moderna can generate $5 billion to $10 billion annually from its COVID, flu and Respiratory Syncytial Virus (RSV) vaccines. It also has a large pipeline of development programs including vaccines against latent viruses such as HIV and medicines for cancer and rare diseases. Recent share price: $147.90.
Trend: Minimally invasive surgery and less invasive diagnostic testing. There’s a growing emphasis on shorter hospital stays and less invasive diagnostic testing to enable early detection of cancer. Companies to invest in…
Bio-Techne Corp (TECH), a leading provider of life sciences research tools, also has a diagnostics business. It has a technology that looks for cancer in small extracellular vesicles called exosomes. The company offers a urine-based test for men who receive an ambiguous PSA test result for prostate cancer. Bio-Techne is developing other diagnostic tests for kidney-transplant rejection and bladder cancer. Recent share price: $71.82.
Intuitive Surgical (ISRG) is a leader in robotic-assisted surgery. Its da Vinci surgical system translates a surgeon’s hand movements into corresponding real-time micro movements of instruments positioned inside the patient. The company is the market leader in robotic-assisted laparoscopic surgery and is expanding the list of procedures that can be performed robotically. Recent share price: $227.78.
Trend: Medicare Advantage (MA). Every day, about 10,000 people in this country turn 65 and become eligible for Medicare, according to the Medicare Rights Center. MA is a private form of Medicare in which the government contracts with private-sector health insurers to provide benefits. According to a Health Affairs report last year, Medicare Advantage could reach 69% of the Medicare population by the end of 2030. Company to invest in…
Humana (HUM) is one of the world’s largest managed-care companies specializing in government-sponsored programs. It has more than 22 million members. The firm also is a leader in stand-alone prescription drug plans for seniors enrolled in traditional fee-for-service Medicare. Although the stock was a strong performer in 2022, there is ample room for continued solid performance. Recent share price: $482.68.
