Which Health Care Stock Belongs in Your Portfolio?

There isn’t much to choose from in Canada, but with an aging population, this may be too good an opportunity to pass up.

| More on:
The Motley Fool

Health care is a sector that’s very underrepresented in Canada, with only two names in the S&P/TSX 60 index. By comparison, healthcare makes up about 12% of the S&P 500.

This is partly due to our public health care system, which eliminates the need for massive health insurance companies, so as Canadians we should be thankful. However, as investors, it presents a problem, because as populations age, healthcare companies stand to benefit immensely; it would be nice to try to take advantage of that in our portfolios.

On that note, below we take a look at Canada’s two large companies in the health care sector.

1. Valeant Pharmaceuticals

There is perhaps no Canadian company more polarizing than Valeant Pharmaceuticals (TSX: VRX)(NYSE: VRX). To the company’s credit, its shares have been on a tear recently, thanks to CEO Michael Pearson’s acquisition-first strategy. Over the past five years, the stock has returned 56% per year.

However, there are some big question marks about Valeant. The problems stem mainly from the company’s accounting, which gets very complicated due to the high level of acquisitions. In fact, the company itself reports financial measures such as “adjusted operating cash flow” and “cash earnings per share” that exclude many acquisition-related costs. On a reported basis, Valeant actually lost $2.70 per share last year. Some very smart people, such as famous short-seller Jim Chanos, are betting against the company.

There are also some very smart people who think the run won’t end. Chief among them is activist investor Bill Ackman of Pershing Square, who would become a major shareholder if Valeant’s acquisition of Allergan (NYSE: AGN) is successful. Mr. Ackman has been continually defending Valeant on television shows.

2. Catamaran

Less well-known is the pharmacy benefit manager Catamaran (TSX: CCT)(NASDAQ: CTRX). Despite being part of the S&P TSX/60, Catamaran makes all of its money in the United States, which allows the company to benefit from some very favourable trends.

One such trend is the increase in prescription drug spending as a result of the Affordable Care Act. The ACA will result in more people being covered by a health plan. This includes pharmacy benefits, as well as maximums on how much the patient has to cover for drugs out-of-pocket. Furthermore, the aging population will also drive drug spending — Americans are forecast to spend nearly $500 billion on drugs by 2020, a big increase over the $250 billion spent in 2009.

In addition, Catamaran does not have the same accounting issues as a company like Valeant, so if you’re simply looking to make a bet on the health care sector, this is the better stock of the two.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

More on Investing

oil tank at night
Energy Stocks

The Oil Boom Isn’t Over: These 2 Energy Stocks Could Rebound Sharply in 2023

Energy stocks like MEG Energy (TSX:MEG) could rebound surge higher in 2023.

Read more »

growing plant shoots on stacked coins
Dividend Stocks

TFSA Investors: 2 Dividend-Paying Mortgage Stocks to Boost Your Income in 2023

TFSA investors can allocate their new $6,500 contribution limits to two high-yield mortgage stocks to boost their tax-free incomes in…

Read more »

stock analysis
Investing

2 Safe Stocks I’m Buying Hand Over Fist Right Now

Although there is still a tonne of uncertainty about the economy heading into 2023, here are two safe stocks to…

Read more »

dogecoin is a speculative investment
Investing

Man’s Best Friend: A Retail Stock That Weathers Recession

Pet care could be recession resistant, so Pet Valu (TSX:PET) should be on your radar.

Read more »

oil and natural gas
Energy Stocks

Better Buy: Suncor Energy Stock or Canadian Natural Resources

Suncor and Canadian Natural Resources are generating strong profits. Is one undervalued?

Read more »

Arrowings ascending on a chalkboard
Dividend Stocks

3 TSX Stocks With Dividends That Outpace Inflation

Investors that worry about losing buying power due to inflation could put money into these three stocks! They’re known for…

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

Dividend Seekers: Which of These 3 TSX Energy Stocks Is a Better Buy?

Which is a better bet among TSX energy bigwigs?

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

3 Top Value Stocks to Buy in December 2022

Stocks such as Bank of Montreal and NFI Group are trading at attractive and cheap valuations in 2022.

Read more »