The alarm bells went off on Wall Street last week as Federal Reserve Chair Janet Yellen warned of a bubble in social media and biotech stocks. Indeed, in her public comments last week, Yellen stated that biotechnology valuations are “stretched, with ratios of prices to forward earnings remaining high relative to historical norms.”
Since her comments, the iShares Nasdaq Biotechnology ETF (IBB) has declined about 4 percent.
To me, Yellen’s comments were a bit behind the curve. That’s because in a Money and Markets column that was released about two weeks before Yellen’s comments, I warned everyday investors to steer clear of the biotech IPO mania.
But with the S&P 500 health sector having gained a bit over 12 percent so far this year and about 25 percent over the past year, I think it’s worth looking at some of the more established and high-quality companies in the industry for investors looking to participate in the health-care boom without taking on a lot of the risk associated with the high flyers.
|Medtronic’s strong cash position supports its commitment to consistent dividend growth|
If biotech companies are too risky, what’s the everyday investor supposed to do?
In last week’s Money and Markets column, I suggested Becton Dickenson (BDX) as a high-quality core portfolio holding. Becton Dickinson is the world’s largest manufacturer and distributor of medical surgical products, such as needles and syringes. The company also manufactures a wide array of diagnostic instruments and reagents. International revenue accounts for 58 percent of the company’s business.
Another one of my favorite companies in the health-care sector is Medtronic (MDT), whose stock has gained about 16 percent over the past year. Medtronic historically has focused on designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes.
Medtronic has slightly shifted its strategy to focus on partnering more closely with its hospital clients by offering greater breadth of products and services to help hospitals operate more efficiently. The recently announced $42.9 billion acquisition of Dublin-based Covidien, which pairs Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with Covidien’s breadth of products for acute care in hospitals, will position Medtronic’s as a key partner for hospitals around the world.
The addition of Covidien ramps up the competition between Medtronic and the No. 1 player in medical technology business, Johnson & Johnson (JNJ), putting Medtronic in prime position to challenge Johnson & Johnson at a time when consolidation and leverage over cost-conscious hospitals is a priority.
Medtronic’s stock has pulled back a bit because the Obama administration wants to stop corporate deals like the proposed Medtronic acquisition that could enable the company to save millions in U.S. taxes by shifting its headquarters to Ireland. But I believe the decline in Medtronic’s stock price represents a buying opportunity for price conscious investors.
As with Becton Dickenson, Medtronic’s strong cash position supports its commitment to consistent dividend growth. With a current yield of 1.84 percent and a dividend payout that’s likely to grow in the future, shareholders can expect a solid cash-on-cash return while they wait for the stock to appreciate.
In today’s risky investment environment, my aim is to focus on high quality and Medtronic and Becton Dickenson are two of the best.
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