As Nortel Networks Corp, JDS Uniphase Corp and other technology companies warned this week of slowing growth, Prudential Securities Inc's Ed Keon recommended investing in health-care stocks such as Johnson & Johnson, King Pharmaceuticals Inc and HCA-The Healthcare Co
Keon said he expects health-care companies in the Standard & Poor's 500 Index to post 10.5 percent earnings growth this year, and technology company profits to slump 31 percent.
Overall profit growth in S&P 500 companies will fall about 3 percent, he said.
Health-care stock valuations are in line with the broader market, and less expensive than technology stocks, Keon said. At the same time, the health-care stocks should benefit as the industry grows, he said. Health expenditures were 13.9 percent of the US gross domestic product in 1997, up from 9.1 percent in 1980, according to the US Department of Commerce.
"The percentage of the US economy accounted for by health care has risen sharply over the past 20 years, and demographic trends suggest it will continue to do so," Keon said.
The year-to-date performance of the 13 recommended stocks on Keon's list: Abgenix Inc, 33 percent; Forest Laboratories Inc, 5.7 percent; HCA-The Healthcare Co, 3.5 percent; HealthSouth Corp, 12 percent; IMS Health Inc, 4.8 percent; Johnson & Johnson, 0.9 percent; King Pharmaceuticals Inc, 4.1 percent; Medarex Inc, 31 percent; Pfizer Inc, 7.3 percent; St Jude Medical Inc, 4.1 percent; UnitedHealth Group Inc, 6.9 percent; Vertex Pharmaceuticals Inc, 36 percent; Wellpoint Health Networks, 24 percent.
As of Thursday, health-care stocks traded at 27 times estimated earnings for the next 12 months, while tech sold at 39 times and the S&P 500 at 22.6 times earnings, Keon said.
"I can't think of another time in the past seven years when health stocks were as attractive as they are today, relative to the market," said Charles Lemonides, chief investment officer at M&R Capital Management Inc Lemonides, who holds Johnson & Johnson, said he's buying shares of Schering-Plough Corp, which have fallen 29 percent this year.
Analysts polled by First Call/Thomson Financial expect health-care company earnings to grow 12 percent this year, down slightly from the 15 percent they forecast at the beginning of 2001. By contrast, analysts who, on January 1, expected technology companies' earnings to grow by 11 percent this year now expect a drop of 41 percent.
"Drugs offer lots of earnings consistency," said Terence McLaughlin, chief investment officer at Ashland Management Inc, which holds Johnson & Johnson and Pfizer shares.
Keon called Johnson & Johnson his "single best idea." While the stock is a good long-term investment, he said, it's also poised to rise over the next few weeks as it moves to the Russell 1000 Index's growth index from the value index.
Money managers who try to mimic the performance of the Russell 1000 growth index may have to shrink their technology holdings as some of those stocks shift to the value side. Those investors are likely to find Johnson and Johnson attractive, Keon said, and that may give the stock a lift in the short term.
Johnson & Johnson shares have risen 11 percent in the past three months.
Keon said demographic trends provide "a wind at the back" of health-care companies, as the world's population ages. The older generation makes more money than did previous generations, Keon said, and wealthier senior citizens are likely to spend more to prolong their lives.
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