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[Healthcare Is The Only Sector Where Investing Now Isn’t That Bad Of An Idea]( By Sven Carlin on April 5, 2017 - Fundamentals and the long-term demographic trend show that the healthcare sector is undervalued. - As it’s a recession-proof sector, largely diversified investors should be overweight healthcare and seize the current halt in price growth. - We’ll discuss the top ten healthcare stocks and show that there is something for everybody to invest in: dividends, stability, low valuation, high valuation, growth, takeovers, etc. Introduction Yesterday’s article focused on how baby boomers will put downward pressure on stocks in the next 15 years. Today we’ll discuss a way to make money on the same trend. The Healthcare Sector The healthcare thesis isn’t a new one as we all know the population is aging. What is important is that the sector has delivered on its potential by consistently increasing earnings without eating up each other’s margins. This makes the sector still attractive even though it has been one of the best performing sectors in the last decade. Figure 1: The healthcare sector (iShares U.S. Healthcare ETF – [IYH]( has boomed since baby boomers began hitting retirement age in 2012. Source: [Nasdaq](. Despite largely beating the S&P 500, the healthcare sector (ETF-[IYH]( isn’t overvalued. On the contrary, it is undervalued. IYH’s price earnings ratio is 21.5 with a price to book ratio of 3.71 and a dividend yield 1.3%, while the S&P 500’s price to earnings ratio is 26.52. The S&P 500’s price to book ratio is a bit better at 3.03 but this includes companies like Exxon Mobile (NYSE: [XOM]( which still hold all their investments at book value even though many of them will never be profitable due to low oil prices and the shale revolution. The dividend yield of 1.9% is higher with the S&P 500, but don’t let the 0.6 percentage points difference trick you because investing in the S&P 500 is far riskier than investing in the healthcare sector. Why Is The S&P 500 Riskier Than The Healthcare Sector? Well, because people will do without a fancy new car or a trip if a recession comes along but they won’t do without medication. In the last bear market, the healthcare sector declined 35.9% from its 2007 peak while the S&P 500 declined 52.6%. I wouldn’t risk an additional 20% of my portfolio for a 0.6 percentage point higher dividend yield, especially given the demographic trends, the higher S&P 500 price earnings ratio, and the fact that healthcare is recession-proof while the S&P 500 is not. Investment Thesis On the macro level, demand for healthcare is bound to continue growing as the population ages. The number of people aged 65 and older in the U.S. is expected to grow from 46.2 million in 2014 to 98 million in 2060. The trend is clear and unavoidable as we all age and there is nothing we can do about it. What we can do is to make some money on it. On the micro level, the healthcare sector saw earnings grow 6.8% and revenues 8% in 2016. This puts the sector among the best sectors of the S&P 500, but I see the sector carrying much less risk than the real estate or consumer discretionary sectors which have similar growth rates. Figure 2: 2016 revenue growth for S&P 500 sectors. Source: [FACTSET](. Any kind of tightening in credit will first hit real estate while higher interest rates will also hit consumer spending. Therefore, if you’re looking for constant growth at a fair price with low risk, healthcare is the place to be. "Artificial Intelligence" Is Crushing Buy And Hold Investing The compound annual returns generated by computer automated trading strategies have crushed buy and hold investing. One strategy, disclosed just ahead, has produced compound annual returns 56X greater than the S&P 500. Deploying this logic in your portfolio could be a retirement game changer. To see how you can put this Artificial Investing Intelligence to work in your portfolio [click here.]( [Misunderstood Option Strategy Earns Novice Trader $41 Million In Only 3 Years]( Find out how you can use it to immediately generate substantial income when the market opens on Monday... even if you're starting with limited funds. It's safe, reliable, and can be duplicated over and over again to generate income you can use right now if you want. Or you can let it snowball into even more. [Click Here To Learn This Strategy]( As for 2017 forecasts, healthcare revenue is expected to grow by 4.5%. This is below the S&P 500 average expected growth of 5.3%, but healthcare shows constant growth which is a rare occurrence among S&P 500 sectors. Figure 3: Estimated 2017 revenue growth. Source: [FACTSET](. The point is that if a shock hits the economy, all other sectors will see significant declines in revenue and earnings while the most resilient sector should be healthcare. Given stable earnings growth and recession resilient characteristics, you would suppose that the healthcare sector is overpriced. The opposite is true. I have already discussed the fundamentals a bit, so what’s left is to check the technical perspective. Despite the 6.8% earnings growth in 2016, the healthcare sector has underperformed the S&P 500. In fact, it hasn’t gone anywhere in the last two years, underperforming the S&P 500 by a whopping 14 percentage points. Figure 4: The healthcare sector has been shunned by investors. Source: [Nasdaq](. The sector underperformed because there were concerns that the government would get involved by lowering prices, and due to the demise of some over-indebted biotech companies like Valeant Pharmaceuticals (NYSE: [VRX](. Fears about government intervention are fading as it turns out it isn’t that easy to change things and changing one thing has multiple effects on the whole system. Biotech companies are now properly valued, and highly leveraged acquisitions—with, consequently, huge drug price increases—are an old business model. Fear is always your ally when investing as the price you pay will be lower. Not to leave it at just the sector level analysis, let’s look at some investment ideas. Investment Ideas I’m against ETFs and any other kind of passive investment schemes because you own both the bad and the good in a sector. A quick look at valuations and leverage will show us what is good and what isn’t so good in the healthcare sector, or, what’s best for you and your investment approach. I have summarized the price earnings ratio, dividend yield, and the total debt to assets ratio of the top ten holdings of the IYH ETF. Figure 5: PE ratio, dividend yield, total debt to assets ratio and personal comment on the top 10 IYH holdings. Source: Data compiled from Morningstar. Each company is different and has specific catalysts and risks. Therefore, investing has to be approached from a personal perspective, which isn’t something you can do by owning an ETF. For example, MERCK (NYSE: [MRK]( is extremely expensive while the expensiveness of Celgene (NASDAQ: [CELG]( is derived from a new oncology drug with extreme growth in U.S. sales and huge global potential. On the other hand, Gilead (NASDAQ: [GILD]( is extremely cheap but it’s due to the fact that it will lose the exclusivity on its best-selling hepatitis drug. There is something for everyone’s taste. Conclusion For me, the above stocks are still too expensive as there are good global companies in the same sector trading at silly valuations. However, if you must own a blue-chip, well-diversified portfolio with more than 10 stocks in it while you don’t want to own an index, it’s a good idea to choose at least some companies from the healthcare sector. The trend is clear, demand for healthcare products will rise due to global economic development and an aging population in the developed world. Despite that, many companies are cheaper than the general market. It’s inevitable that in the long term, the cheaper companies provide investors with higher returns. This is extremely important because just a 2 percentage point difference in returns over 20 years has a huge impact on total returns. Therefore, chose your investment wisely. Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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