There’s a lot of fear right now that the stock market could be a bit overbought thanks to a rip-roaring run to start 2012. The S&P is up more than 9% so far in 2012, with the tech-heavy Nasdaq up an amazing 15% since Jan. 1. Yes, there are some encouraging economic indicators — but with unemployment still above 8% and housing still a major problem, there’s no doubt that this so-called bull market is very fragile indeed.
Oh yeah — and there’s the prospect of $5 gasoline prices to cheer about, and the continual risk of a Greek sovereign debt default.
So what are investors to do? Hiding out in cash is certainly safe, but the 2.9% current annual inflation rate will erode your savings. Treasuries provide a bit of returns, but 10-year T-Notes are yielding less than 2% as of this writing — still a losing proposition.
Other than gold, the ultra-volatile hard asset of choice these days, there really aren’t a lot of options other than equities right now.
That’s why investors need to take a cautious approach to the current rally, and protect themselves even as they hope to ride the momentum. That involves investing in stocks that have stability and long-term potential that will serve them well, even if short-term troubles rear their ugly heads.
To that end, here are three crash-proof health care investments to help keep your portfolio’s pulse — even if things sour in the coming months:
Medical software and technology stock Cerner (NASDAQ:CERN) might not be a well-known name to most investors, but this $12 billion company is worth a look. After all, it’s up 46% in the past 12 months — almost seven times the Dow Jones Industrial Average — and has tripled in the past five years.
Cerner is a fast-growing company because it helps health care companies and hospitals run their operations efficiently, but it also has big growth potential if the expected push into electronic medical records really begins in earnest. If government regulators get their way, there will be a federal mandate to make patient records digital and portable — and that means booming business ahead for Cerner.
Growth hasn’t been a problem for the past few years, however, so don’t think this is the only reason to be bullish. Cerner has posted nine straight quarters of revenue growth and eight straight quarters of year-over-year profit increases.
The raw gains are as impressive as the consistency. Revenue jumped 10% and profits increased by 20% from fiscal 2009 to 2010, then revenue soared 19% and profits were up 26% from fiscal 2010 to 2011.
As for 2012? Forecasts are for another 22% in profit growth.
The valuation is a bit high on Cerner, at a P/E of almost 28 based on fiscal 2013 earnings projections. But there are many reasons to expect this company to keep up its momentum.
Big Pharma isn’t exactly a stable health care play, since many of these companies face looming patent expirations that could really hurt their bottom line. Abbott Laboratories (NYSE:ABT), however, is better than some of the other options out there when it comes to the patent expiration game.
For instance, its powerhouse arthritis medication Humira doesn’t go off patent until 2016.
This longer lead time has provided a bit of stability to Abbott in recent years, with five-year returns of over 8% — that’s not just better than peers like Pfizer (NYSE:PFE) and Merck (NYSE:MRK), which are in the red by double-digits, but it’s also better than the broader DJIA.
That’s because revenue has increased year-over-year for 11 straight quarters — a heck of a track record.
Longer-term, the company is working on spinning off its brand-name medications from its generic operations, diagnostic devices and nutritional operations that include its profitable Enfamil baby formula. The move could insulate Abbott — and investors seem to like the look of things, based on strength in recent months.
In the meantime, Abbott’s brand-name drug operations continue to forge ahead with new product launches, so don’t be scared off until this spinoff transpires. Abbott has built a solid drug pipeline to drive future growth, including separate positive trial results for treatments for multiple sclerosis treatment and chronic kidney disease. These are smaller patient pools, but the drugs can be highly profitable.
A juicy income stream also makes Abbott an attractive low-risk bet. ABT yields 3.6% and has paid dividends since 1926.
Abbot is a good mix of stability and growth. Its nice dividend and its strong generics/devices operations will provide reliability for your portfolio.
Medical equipment stock Covidien (NYSE:COV) is a very different kind of play on the health care sector than Cerner. This is what financial industry insiders call a “secular growth story,” because it’s simply in the right place at the right time. It is a major medical device provider for clinical and home health markets, and both of those segments will see big profits as the aging baby boomer population drives up demand.
Covidien became an independent publicly traded company after being spun off from Tyco International (NYSE:TYC) in mid-2007. The move has allowed this health care giant to refocus and provide strong returns. Since its spinoff, COV stock is up about 23%. The Dow and the S&P are both in the red. The past 12 months haven’t been overly impressive, with a roughly 4% gain that has slightly lagged the S&P and the Dow, but momentum has been decidedly on the upswing in 2012. Covidien is up almost 17% since Jan. 1, vs. 6% for the Dow and 9% for the S&P 500.
This with a still-affordable P/E of 12.1.
Medical devices are a great example of growth and defense. Health care is recession-proof because consumers will cut back on just about everything before they decide to forgo medications or a trip to the emergency room. Also, the aging baby boomer population builds in growth as older Americans become more dependent on medical technologies.
It’s a win-win situation.
And like Abbott, Covidien is contemplating a drug spinoff to maximize its healthy operations. Analysts have suggested Covidien might execute a split that separates its medical products business that includes trays, hypodermic needles, retractors, pumps for patient feeding and pain management, and other items used in hospitals. These products are the most attractive part of COV, so if and when this happens, the spinoff will be a heck of a growth buy. Until then, Covidien remains a powerful health care investment with its drug operations rolled in.
A hidden bonus is the divided. Covidien has a modest yield of 1.7%, but a mere 11% of its profits go toward quarterly payments! Historically, payout ratios total 50% or more for the broader S&P 500, meaning this company is overdue for a significant increase. The company upped its payout 12.5% in 2011, and you can expect a big hike again this year. Covidien can foot the bill, with a $1.8 billion cash cushion.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.