Buy the Dip in the Healthcare Sector with Autocallable Reverse Convertibles

Viewpoint

The global Health Care sector remains fundamentally attractive (valuation, profitability, earnings revisions) but given the volatility around the US election, we temporarily put the sector on neutral. We believe, however that health care will be supported by more fiscal spending on health around the world. We also see that health care stocks are already very attractive taking 12M forward profitability into account. Therefore, we believe that any setback is an investment opportunity.

Investors interested in building exposure to the sector may wish to consider an Autocallable Reverse Convertible. In the worst case, it offers the possibility to get the worst performer stock at a lower level compared to the market price (“buy-the-dip” opportunity).

Below, we suggest two stock selections, one comprised by US Pharma and the second with exposure to European/Swiss Pharma.

US Pharma Selection

  • Pfizer: Pfizer's foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company's large size confers significant competitive advantages in developing new drugs.
  • Johnson & Johnson: Johnson & Johnson stands alone as a leader across the major healthcare industries. The company maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide competitive advantage.
  • Merck: Merck's combination of a wide lineup of high-margin drugs and a pipeline of new drugs should ensure strong returns on invested capital over the long term.

European/Swiss Pharma Selection

  • Roche: In our eyes the strongest and most visible drug pipeline in the Pharma sector. Growth acceleration is also possible given innovation around the fight against the pandemic.
  • Sanofi: Sanofi's wide lineup of branded drugs and vaccines and robust pipeline create strong cash flows and competitive advantage.
  • Fresenius SE & Co KGaA: Fresenius SE’s prowess in dialysis and injectable therapies has created opportunities to vertically integrate into several medical service and technology businesses by organic and inorganic means.
DT - Insights - Trade Idea - Healthcare - Block1
DT - Insights - Trade Idea - Healthcare - Block2


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Source

  • Roche: Stefan Schneider, Vontobel Analyst.
  • Other underlyings: Morningstar (Research Notes upon Request).