Just nine months of 2022 have already seen more stock market bottlenecks than most full years ever see. The supply chain are still snarled and Europe is facing an energy crisis just as winter is approaching, but the headline headwind is inflation, which, despite easing slightly in July and August is still running at 40-year highs. The Federal Reserve is moving aggressively to raise interest rates in response – and the result is a looming prospect of a deep recession.
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It’s a situation made for defensive stocks, but investors will need to tread with caution. According to Gargi Chaudhuri, who leads investment strategy at BlackRock’s iShares America, we shouldn’t expect the Fed to ease back on rates until 2024 at the earliest – so investment choices made now are going to have an impact on the long term.
“In the past, easing policy too quickly after raising it hasn’t been the right course of action… When and if the economy slows down – and we’ll obviously begin to see signs of that in the data – that’s when they begin to cut rates, and I would imagine that the dot plot shows that taking place in 2024,” Chaudhuri wrote.
The right move for investors, in Chaudhuri’s view, is a move into high-quality healthcare and pharma stocks. Both tend to resist recession and generate cash in any conditions.
“Healthcare is more attractively priced and will still give you that quality, which means that those companies are likely to do a little bit better even if inflation continues to be persistent into next year,” the BlackRock strategist added.
So let’s follow her lead, and take a look at two healthcare stocks that can weather hard times. According to TipRanks database, Wall Street’s analysts rate both as Strong Buys due to their quality and growth potential over the long haul.
Eli Lilly & Company (LLY)
First up is Eli Lilly, a $281 billion Big Pharma stalwart founded in 1876 by its namesake, the Indiana pharmacist and Civil War veteran Colonel Eli Lilly. The company has expanded over the years, and now boasts a strong lineup of quality medicines, approved for use in treating such serious conditions as cancer, diabetes, and immunological disease.
An important recent approval Lilly received from the FDA was for Mounjaro, a new treatment for diabetes. Mounjaro was approved by the FDA in May of this year, as the first – and currently, only, GIP and GLP-1 receptor agonist for adults with type 2 diabetes. The drug is available in 6 doses, and has a potential patient base of up to 35 million people.
In another recent approval, the FDA gave the green light to Lilly’s Retevmo, a cancer drug designed for use against advanced and metastatic solid tumors. The FDA approval of Retevmo is for tumor agnostic cancers, and includes non-small cell lung cancer.
Lilly reported a busy second quarter this year, with the US launch of Mounjaro and the US, European, and Japanese approvals of the alopecia medication Oluumiant. The company reported 20% growth in several of its key medication lines, which all together made up 67% of the total revenues. The top line came to $6.48 billion, down 4% year-over-year.
Given its known linkages to such serious comorbidities as obesity and cardiovascular problems, BMO analyst Evan Seigerman sees Mounjaro as the key to Lilly’s performance in the short term. He writes: “Lilly will likely drive uptake with a ‘wall of data.’ Additional studies… should drive a real world adoption as patients, providers and payers get on board. We expect this step up to broaden usage beyond what we’ll see in diabetes. Given what we know about morbidity and mortality in obesity, we think improvement in CV outcomes for the class will be easy to quantify over time, based on the significant weight loss achieved as well as secondary endpoints from these studies.”
To this end, Seigerman gives LLY shares an Outperform (i.e. Buy) rating and a price target of $396, implying a one-year upside potential of 27%. (To watch Seigerman’s track record, click here)
It’s not as if other Street analysts are shy of predicting big things for this healthcare giant, either. With 9 Buys and no Holds or Sells in the last three months, the consensus is that LLY is a Strong Buy. While less than Olson’s forecast, the $368.63 average price target still indicates upside potential of ~19%. (See Lilly stock forecast on TipRanks)
Thermo Fisher Scientific (TMO)
Next up is Thermo Fisher, another company in the scientific and medical research realm – but not one directly involved in the research. Rather, Thermo Fisher is a designer and manufacturer of a wide range of scientific lab equipment and instruments, as well as the chemical and material supplies used in sampling and testing. Thermo Fisher even provides lab-oriented software packages. The company’s products are used by a customers in any field that conducts lab work, including medical research, academia, and government.
Thermo Fisher showed some solid results in its 2Q22 financial report. Top line revenue was up 18% year-over-year, to reach $10.97 billion, the second-highest quarterly result in the past two years. The company was profitable, with a non-GAAP EPS of $5.51. While down from the year-ago result, the drop was only 1.6%. EPS beat the $4.99 forecast by a 10% margin.
This stock has caught the eye of Morgan Stanley analyst Tejas Savant, who sees the current share price as an opportunity to pick up a quality scientific stock.
“We see a premium to the peer group as justified, based on TMO’s strong track record of resiliency and execution against a challenging macro backdrop, with strong, secular growth in their base business, alongside a prudently conservative guidance framework for ’22 that continues to leave room for near-term upside… We continue to believe that TMO is among the best positioned across the LSTDx sector to drive above -peer/-market growth, given the combination of their resilient and diversified business model, strong operational track record and mgmt team,” Savant opined.
Taking the logical step from these comments, Savant rates the shares an Overweight (i.e. Buy), and gives them a $678 price target, suggesting an upside of ~32% in the next 12 months. (To watch Savant’s track record, click here)
Checking in with the Street, we find that there are 10 recent reviews for this stock, including 8 to Buy and 2 to Hold, for a Strong Buy consensus rating. Shares of TMO are selling for $515.50 and have an average price target of $664.33, implying an upside of ~29% on the one-year time horizon. (See TMO stock forecast at TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
