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3 Safe Healthcare Stocks to Ride out the Current Volatility

The continued rise in yields has spooked investors, leading to a week of wild market swings. But David Cohne has the best way to play this volatility. Learn why he thinks investors should consider Johnson & Johnson (JNJ), Novartis (NVS), and Fresenius Medical Care (FMS).

Hold onto your seats because the market is getting bumpy. But there is a way to navigate these choppy waters. 

Thanks to the Fed, stocks are rising and falling more than a roller-coaster at Six Flags. While we ended on a positive note today with gains across the board, the week has been anything but uneventful. Even today started on a sour note after investors assessed another jump in Treasury yields. 

Since I expect this volatility to continue, I think investors should consider safe and stable stocks such as Johnson & Johnson (JNJ), Novartis AG (NVS), and Fresenius Medical Care (FMS).  But before I get into evaluating those stocks, let's recap this eventful week.

Market Commentary

Monday started with a bang as stocks rallied after a tough week. They got a boost as bond yields dropped following a rapid rise. The yield on the 10-year Treasury was down to 1.46%, from a high of 1.55% last week. Also helping matters was the passage of the $1.9 trillion COVID-19 relief package by the U.S. House of Representatives and JNJ's single-shot COVID-19 vaccine receiving emergency use authorization by the FDA.

The excitement didn't last, though, as concerns over rising bond yields remained on investors' minds. The market was down modestly lower on Tuesday. A warning from China's top banking regulator that stock market rallies looked like bubbles didn't help matters. Stocks fell again on Wednesday as rising Treasury yields led to a selloff in tech stocks, with the Nasdaq Composite shedding 2.7%.

Things didn't get any better on Thursday as the tech selloff worsened. Interest rates spiked after Federal Reserve Chairman Jerome Powell reiterated that the Fed is unlikely to alter its policy until it sees inflation rise sustainably. The 10-year Treasury yield rose to 1.54%. Today looked like it would be a repeat of the past three days as technology stocks briefly hit correction territory, with the Nasdaq Composite extending its losses over 10%. But U.S. stock indexes finished sharply higher Friday after a strong jobs report.

Market Outlook

I believe this market volatility is here to stay. Yields have been climbing based on optimism for a growing economy and expectations of higher inflation. As long as the Fed remains on its current path, yields will likely continue to rise. We saw what happened on Thursday after Powell made his remarks, which didn't include any guidance on the markets.

The way to play this market is with what I call “safer stocks.” These are stocks that have historically shown stable fundamental data and price returns. The best way to find these stocks is to use the POWR Stability Grade, one of the component grades of the POWR Ratings. The Stability Grade is based on 18 different measures of Stability in fundamentals, price, and volume. This helps find stocks with steadier action.

Ideal safe stocks have an overall rating of Strong Buy or Buy and a Stability Grade of A. This is why I am recommending the safe healthcare stocks below.

Johnson & Johnson (JNJ

One of the most recognizable names in all of healthcare, JNJ has been at the forefront of providing pharmaceuticals, medical devices, and consumer health products. The company recently has seen its share of headlines as it has begun shipping its vaccine in the U.S. and is expected to have 20 million doses delivered by the end of March.

Its pharmaceutical division contributes almost 50% of total revenue and has the best future growth prospects. The company offers several industry-leading drugs, such as immunology drugs Remicade, Stelara, and Tremfya, and cancer drugs Darzalex and Imbruvica. JNJ also holds a high market share in the medical device space with orthopedic and Ethicon Endo-Surgery's surgical devices.

The stock has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. As previously mentioned, JNJ also has a Stability Grade of A. This isn't surprising as it currently sports a low beta of 0.67 and a steady revenue growth history. JNJ also has a Quality Grade of B due to its strong balance sheet. The company had $25.2 billion in cash as of the end of the year, compared with only $2.6 billion in short-term debt.

We also grade JNJ based on Growth, Value, Momentum, and Sentiment. You can access those grades here. JNJ is ranked #8 in the Medical – Pharmaceuticals industry. You can find other top stocks in that industry by clicking here.

Novartis AG (NVS)

While not as famous as JNJ, NVS certainly holds its own. NVS develops and manufactures healthcare products through two segments: Pharmaceuticals, including primary care and specialty medicines, and Sandoz, which includes generic pharmaceuticals. The majority of its revenue, though, is driven through the Pharmaceuticals segment.

The company has strong positions in multiple critical therapeutic areas, which bodes well for its long-term growth. Its strategy is to focus on areas of unmet medical needs. This helps strengthen NVS's pricing power. NVS has a large number of blockbuster drugs such as Entresto for heart failure, Cosentyx for immunology, and Tasigna for cancer. NVS also has a robust late-stage pipeline of new drugs expected to launch during the next several years.

NVS is rated a Strong Buy with a grade of A in our POWR Ratings system. Like JNJ, it has a Stability Grade of A. Also, like JNJ, its beta is low at 0.63. The company has a stable history of earnings and EBITDA growth. It has a Value Grade of B, which makes sense due to its low valuations. The stock has a forward P/E of 13.83 and an EV/EBITDA of 13.2, which is below the industry average.

To get access to NVS's other grades (Growth, Momentum, Sentiment, and Quality), make sure to click here. NVS is ranked #4 in the Medical – Pharmaceuticals industry.

Fresenius Medical Care (FMS)

JNJ and NVS make their money primarily in the pharmaceutical industry. FMS, on the other hand, is the largest dialysis company in the world. It serves 345,000 patients in roughly 4,000 clinics across the globe. In addition to dialysis services, it provides dialysis products, including machines, dialyzers, and concentrates.

The company treats end-stage renal disease patients through its dialysis clinic network. Due to its status as the industry's leading company, it should continue to benefit from strong demand in developed markets and expansion into emerging markets, such as China. Increasing at-home treatment rates could also add to growth.

The stock has an overall grade of B or a Buy rating in our POWR Ratings service. It holds a Stability Grade of A with a beta of 0.60. The company also has a stable history of revenue growth. FMS also has a Quality Grade of B based on its strong fundamentals. For instance, it has a current ratio of 1.2, indicating it has more than enough to meet short-term obligations.

You can find FMS's grades in Growth, Value, Momentum, and Sentiment here. FMS is ranked #11 in the Medical -Services industry. You can find other top stocks in that industry by clicking here.

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JNJ shares . Year-to-date, JNJ has declined -0.20%, versus a 2.61% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.


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