Dump These Healthcare Stocks Getting Amazoned

Amazon.com (Nasdaq: AMZN) has often been referred to as the ‘Death Star’. In Star Wars, this was the ultimate weapon, capable of destroying an entire planet. Not a bad analogy, considering Amazon’s ability to totally disrupt the existing order of entire industries.

Next on the list of industries to be disrupted looks to be healthcare, as Amazon recently announced a partnership with Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A and BRK.B) and JPMorgan (NYSE: JPM). The three behemoths are forming a not-for-profit healthcare firm whose goal will be to lower costs for the three companies nearly one million employees and “potentially all Americans”.

This is good news for American consumers. Here’s why…

The rising price for healthcare in the U.S. has meant health benefits now make up about 20% of total worker compensation, up from a mere 7% in the 1950s. This is likely one of the major reasons why we have wage stagnation in our country. Healthcare – emergencies and the cost of them – are also the number one reason for personal bankruptcies in the U.S.

Ripe for Disruption

But while the Amazon-led venture may be good for consumers, any company in the healthcare sector, except those that actually provide the care or manufacture medicines should be shaking in their boots.

The reason why was summed up nicely by Carmen Weelso, director of research at Janus Henderson, when she spoke to the Financial Times. She said, “The healthcare sector is ripe for disruption. [JPMorgan, Berkshire, Amazon] are potentially creating a model for something that is a lot cheaper than what is out there already.” Weelso added, “Healthcare margins are fat, and it is opaque how they make their decisions. Their profits have been great, so they’ve got a target on their back.”

This venture will be a competitive threat to all of the many middlemen in the healthcare sector. These include insurance companies, wholesalers and pharmacy benefit managers (PBMs). I’m sure the CEOs of these middlemen companies recall Jeff Bezos’ words: “Your margin is my opportunity.”

The U.S. simply has too many middlemen involved in its healthcare system. And so despite spending more per capita on healthcare than any other developed country, the US still ranks 12th out of the 12 wealthiest industrialized countries when it comes to life expectancy, according to data from the Organization for Economic Co-operation and Development (OECD).

So make no mistake – this venture is aimed squarely at those middlemen driving up the cost of healthcare. Warren Buffett said, “The ballooning cost of healthcare act as a hungry tapeworm on the American economy.” And he’s right – check out this graph on rising drug costs:

So what sectors are companies are in the crosshairs of these three giants of American industry?

First are the healthcare insurance companies. These include the top five U.S. insurers: UnitedHealthAnthemAetnaHumana and Cigna. UnitedHealth alone provides or manages employee health insurance for nearly 30 million people.

Next come the PBMs that negotiate drug prices on the behalf of insurance firms and employers. These include Express Scripts and CVS Health and UnitedHealth. These latter three are involved in the lives of 250 million people!

And while the drugmakers will not be affected directly – Amazon will not begin manufacturing drugs – they will be affected in so far as they may struggle trying to maintain premium pricing on their drugs.

What the Venture May Do

While no one yet knows what exactly the venture may do, I think their first target will be insurance.

Amazon, Berkshire and JPMorgan will “self insure” their employees on a not-for-profit basis. Importantly, they would likely invite more companies to join the initiative in the very near future.

Some large companies, including all the U.S. automakers, already fund their own insurance plans by keeping the premiums and setting aside capital for potential losses. But they have contracted with the health insurers and PBMs to manage the plans. That has left control and fat profit margins still in the hands of those firms. For example, Amazon uses Express Scripts as its PBM and JPMorgan uses both Cigna and UnitedHealth to meet its employee healthcare needs.

This alternative is definitely needed. According to the Kaiser Family Foundation, annual premiums for employer-sponsored family health coverage reached $18,764 last year, up 3% from 2016. Workers, on average, paid $5,714 towards the cost of their coverage with employers picking up the rest. You can clearly the rising cost of healthcare insurance:

The not-so-funny joke among those in charge of employee benefits is that they currently have no option but to deal with ‘CUBA’ – Cigna, UnitedHealth, Blue Cross, Anthem or Aetna. But now, there will soon be a much cheaper and very viable alternative in the form of this newly-formed Amazon-led venture.
Investment Implications

So what could the investment implications be for you? They’re pretty obvious.

It should give you another reason to own  Amazon, if you needed one. I think the ‘Death Star’ will be successful in disrupting another sector, benefiting American consumers.

And even though the middlemen companies will fight change tooth and nail (already the big insurers have voiced their ‘concerns’ to JPMorgan’s Jaime Dimon) I would avoid or sell the stocks of all these companies.

I would even go as far as, if you have a high risk tolerance, to look at shorting these two ETFs that are loaded with middlemen stocks, the iShares U.S. Healthcare Providers ETF (NYSE: IHF) and the SPDR S&P Health Care Services ETF (NYSE: XHS).

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7 Stocks to Own Should the Latest Correction Get REALLY Ugly

It’s official. The latest correction in the markets has entered scary territory. If you’re one of the thousands of investors freaking out, you might want to consider these seven stocks to own should things get really ugly.

Boy, did it come out of the blue, or what?

The S&P 500 gained 5.7% in January. By the end of trading Feb. 7, it had lost more than 80% of those gains culminating with the index’s reversal of fortune.

Up 1.2% in the first few hours of February 7 trading, investors fled in droves, sending stocks for a 0.5% loss on the day, the fourth negative performance in five days of trading erasing more than a trillion dollars in market cap. 

Where to hide other than cash?

Here are seven stocks to own I believe can withstand whatever else this correction throws at investors.

You’ll note all seven have little or no debt, lots of free cash and as wide a moat as possible.

Happy investing.

Stocks to Own Should Latest Correction Get Really Ugly: Public Storage (PSA)

I recently moved from Toronto to Halifax, a thousand-mile change in residence. Not having moved in a while, my wife and I had accumulated a lot of junk.

It made me realize that people don’t like to part with their junk, hence the growth in self-storage facilities like the ones owned by Public Storage (NYSE:PSA).

There’s a two-step process. 

First, you realize your house is overloaded with stuff, so you rent a storage locker to declutter. Then after a few years, you forget why you had a storage locker in the first place, so you call someone like 1-800-Got-Junk to haul it away. And then you repeat the process over and over until you die.

I’m facetious, of course, but I’m sure there’s a grain of truth in what I’m saying. In good times and bad, people are always looking for storage space.

Last July, I called PSA a boring stock to own, which it is, because it operates in an industry that’s only going to keep growing as boomers downsize.

Since recommending its stock, it’s down a little more than 10%. At the time, I thought it was cheap; it’s even cheaper today. It yields an attractive 4.3%. 

Stocks to Own Should Latest Correction Get Really Ugly: Acuity Brands (AYI)

Stocks to Own Should Latest Correction Get Really Ugly: Acuity Brands (AYI)

Source: Shutterstock

Consider this my contrarian pick of the bunch.

Acuity Brands, Inc. (NYSE:AYI) specializes in lighting solutions for homes and businesses. It has been in an awful funk in recent years after going on a big run that saw its stock deliver annual returns of 29%, 62%, 29% and 67% between 2012 and 2015.

In January, I called Acuity Brands one of the ten stocks that could surprise in 2018. That’s on top of recommending its stock on two occasions in 2017.

Since my article, it has lost another 20% on top of the 24% it lost in 2017.

A glutton for punishment, I can’t ignore the fact analysts expect it to earn $9.40 a share in 2018 and $10.23 in 2019. That’s less than 15 times its forward 2019 earnings.

Considering its P/E ratio hasn’t been this low since 2008, I see Acuity as a smart buy in a market that’s taking down overpriced stocks.

Stocks to Own Should Latest Correction Get Really Ugly: Hormel Foods (HRL)

When times get difficult, many people eat to forget their problems. A company like Hormel Foods Corp (NYSE:HRL) can help with that. Some of its brands have been around for years such as Spam, its mystery meat product in a can.

Hormel as increased its dividend for 52 consecutive years. In times of market volatility, it’s nice to know you’re going to get paid regardless of what happens to the stock price in the interim.

In October, Hormel announced that it was paying $850 million to acquire Columbus Manufacturing, Inc., a California business that specializes in premium deli meats under the Columbus brand. Together with its other deli brands Hormel and Jennie-O, it allows the company to provide a stronger offering to grocery stores in the refrigerated foods aisle.

Accretive to earnings in both 2018 and 2019, this is an excellent example of a strategic investment that will transform this segment of Hormel’s business.

Hormel stock has flatlined since early 2016. The Columbus acquisition should help get it unstuck. Until it does, a 2.3% yield isn’t a bad trade-off for a stock that’s trading at 17.5 times cash flow, its cheapest valuation since 2012.

Stocks to Own Should Latest Correction Get Really Ugly: Tractor Supply (TSCO)

Stocks to Own Should Latest Correction Get Really Ugly: Tractor Supply (TSCO)

Tractor Supply Company (NASDAQ:TSCO) serves the rural lifestyle. Its combination of product offerings provides a nice contrast to retailers like Walmart Inc (NYSE:WMT) and Home Depot Inc (NYSE:HD).

In the last couple of years, TSCO’s stock has missed out on the broader rally in the markets and now trades in the high $60’s, well off its all-time high of $97, hit in May 2016.

Its recent earnings results are encouraging — same-store sales up 4% in Q4 2017 compared to 3.8% a year earlier; transactions were up 2.7% and average ticket increased 1.3% — but it needs to work a little harder on keeping margins in check if it also wants to grow the bottom line.

A big reason for the 120 basis point increase in its Q4 2017 SG&A expenses is Tractor Supply continues to work on providing a better customer experience through technology and employee training and those things cost money.

In 2018, TSCO sees comps of at least 2%, net income of between $490 million and $515 million, and net sales of at least $7.69 billion.

In the past week, TSCO stock’s seen a 12% slide in its share price and is now trading at 16.7times its forward earnings, which is well below its average P/E ratio over the past decade. 

Perhaps, this too is a contrarian pick for a volatile market, but I see a stock that’s taken a beating for far too long and is ready to come to life.

Stocks to Own Should Latest Correction Get Really Ugly: Carter’s (CRI)

Stocks to Own Should Latest Correction Get Really Ugly: Carter’s (CRI)

Source: Shutterstock

When it comes to buying clothes for babies and young children, Carter’s, Inc. (NYSE:CRI) has the upper hand on the rest of retail. Between the Carter’s and OshKosh B’gosh brands, many new parents make it a must visit, hence why it’s the largest branded marketer of apparel to these two age groups.

Sure, we might not be having kids at the same rate as in the past, but we’re definitely willing to spend money on those we do bring into the world. We’ll forego buying ourselves a nice pair of pants to buy that cute jumper for our newborn.

In Carter’s Q3 2017 results announced at the end of October, it had notably strong U.S. results. Retail same-store sales increased 2.6% on the strength of eCommerce comp growth of 20.9%, offset by a 3.2% decline in brick and mortar sales.

Interestingly, that’s not necessarily a bad thing for the company. As customers become accustomed to the fit of its clothes, it makes sense for returning buyers to purchase online saving themselves time.

Omnichannel means you’re sometimes going to see store comps contract as eCommerce grows. It’s a fact of life in the new retail.

Carter’s continues to drive margins higher generating record free cash flow which it uses to buyback shares, pay dividends and keep debt low.

As long as people have kids, it’s a great stock to own in volatile markets. 

Stocks to Own Should Latest Correction Get Really Ugly: Church & Dwight (CHD)

Church & Dwight Co., Inc. (NYSE:CHD) not only is a great stock to own should the markets get really ugly, it’s one of the most consistent performers trading on the NYSE.

Back in 2016, I wrote about the consumer packaged goods company’s perfect record over the past decade. It hadn’t experienced a single year in negative territory. It’s carried on with that tradition notching gains of 5.8% in 2016 and 15.3% in 2017. 

The gains over the past two years seem insignificant compared to the S&P 500, but over the long haul, Church & Dwight has delivered for shareholders. A $10,000 investment in CHD stock at the beginning of 2008 is worth approximately $42,000. The same investment in the index is worth approximately $23,000 or 40% less.

The company has a proven method for building its business through acquisitions and organic growth. By focusing on a few healthy brands, it’s able to grow market share over time.

If you’re going to buy only one consumer defensive stock for your portfolio, Church & Dwight ought to be it.

Stocks to Own Should Latest Correction Get Really Ugly: Jacobs Engineering (JEC)

Stocks to Own Should Latest Correction Get Really Ugly: Jacobs Engineering (JEC)

Source: Shutterstock

While an infrastructure plan is said to be coming from the White House at any moment, Jacobs Engineering Group Inc (NYSE:JEC) is too busy to notice.

The professional services company just released its Q1 2018 results and they were very healthy with adjusted net earnings up 13% to $97 million or $0.77 a share with double-digit organic revenue growth from its professional services segment.

The company continues to integrate its 2017, $3.3 billion acquisition of CH2M, Colorado’s largest privately held company. Jacobs is excited about the future with CH2M a part of the company.

Jacobs raised its fiscal 2018 guidance for adjusted earnings from $3.75 a share to $4.05, almost a 10% increase, as a result of the lower corporate tax rate.

It finished the quarter with a backlog of $26.2 billion. As the company continues to focus on profitable growth, I would expect JEC stock to hold up well should the markets continue to correct.

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