(Last week) saw the continuation of the pattern we’ve seen throughout April, with stocks gradually digesting truly horrific economic data as the COVID-19 crisis unfolds.
The economic data remains nebulous. We’ve seen 22 million people laid off and early indications of a 12% decline in gross domestic product (GDP) in the current quarter.
But at least the medical situation finally seems to be plateauing. People with serious COVID-19 symptoms are no longer coming into emergency rooms at an exponentially increasing rate.
And with that in mind, it makes sense to start a defensive portfolio with the biggest health care stocks. After all, while the medical side of the economic landscape has been tested, the hospitals are holding up better than many investors feared.
We can’t gauge the economic dislocations that are ahead yet. However, we know the medical situation is already seeing daylight. That’s a great strategic argument for medical stocks.
My recent discussion revolved around food and the retail channels that distribute it. We have the breadbasket economy covered.
As you know, I love the “Big Food” stocks and the smartest delivery networks. People have learned to eat at home. Many have stopped going out to shop, electing instead to have their groceries delivered.
Likewise, “Big Health Care” is in a relatively strong position as we look toward the post-COVID-19 economy. I actually see positive earnings growth for the sector this year.
Admittedly, margins are under pressure. It’s expensive to run emergency rooms in a pandemic. Discretionary medicine has been frozen in the meantime, locking down many once-profitable specialties.
But people will do what it takes to keep refilling prescriptions. I see health care revenue expanding 6% beyond its 2019 levels this year, which, again, is heroic stuff compared to a projected decline for the S&P 500.
I would not be shocked to see S&P 500 earnings plunge 15% this year, effectively erasing the benefit of the corporate tax cuts. That’s going to sting, but it’s far from the end of the world.
Either way, even a little positive movement will feel amazing in that environment. Outside Big Tech and utilities, everything else in the market is looking towards a year of stagnation at best.
We’re moving to the sidelines on large segments of the consumer discretionary sector as well as energy and a lot of manufacturing. Those stocks simply aren’t worth our attention right now.
Johnson & Johnson (NYSE:JNJ), on the other hand, is worth our interest. The stock is up 3% year to date (YTD) and yields 2.6% right now. This is enough to replace Treasury debt in part of your portfolio, while also providing you with a growth opportunity.
When 2021 rolls around, I see JNJ handing shareholders 18% year-over-year growth. That’s only a few months away, with that dividend justifying a little patience in the meantime.
UnitedHealth Group Inc. (NYSE:UNH) is also a decent alternative to Treasury bonds with a 1.6% yield. It is down only 2% YTD. Again, that’s remarkable resilience after the S&P 500’s 13% swoon.
It isn’t growing fast, but it isn’t collapsing either. These are the kinds of stocks that will form the backbone of my Value Authority as the year goes on.
And once you have the foundation in place, it’s time to reach for growth. That’s where Baby Biotech comes to the table. That’s what we’ll be talking about soon.