Investors are hungry for quality stocks that trade at reasonable valuations following one of the most rewarding years of this bull market.
In an exclusive interview, Dubravko Lakos-Bujas — JPMorgan’s chief US equity strategist and global head of quantitative research — explained why an underperforming sector provides these benefits and is also the best defense against a crash.
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In a year when almost everything rallied strongly, healthcare stocks were among the underdogs.
The sector gained 19% last year, which seems super-impressive until you consider that it lagged the S&P 500’s 29% rally and was the second-worst performer in the index.
Its underperformance did not come as a surprise to Dubravko Lakos-Bujas, JPMorgan’s chief US equity strategist and global head of quantitative research. He had rated the sector an “underweight” and described this move as one of his biggest out-of-consensus calls for 2019.
Lakos-Bujas has now made a full U-turn on the sector. Not only does he rate healthcare as an “overweight,” he told Business Insider the sector is poised to provide the best relative defense against a downturn.
His recommendation comes right after the second-strongest year of the record-long bull market — an ideal time for investors to buy companies that are both quality in nature and reasonably priced. For Lakos-Bujas, select healthcare companies cover these two bases and add yet more value to portfolios as “defensive growth” stocks.
The “underweight” he slapped on the sector last year was partly motivated by its rich valuation compared to peers. But after many months of underperformance, he says prices have been reined in sufficiently enough to go bargain hunting in that space.
By contrast, traditional safe-haven sectors like utilities, consumer staples, and real estate were all the rage when recession fears flared up last year. Lakos-Bujas is now wary of the crowding that may have developed in these sectors, and recommends that investors “underweight” them in favor of healthcare.
The sector did not underperform across the world, Lakos-Bujas noted. Outside the US, it benefitted from investors’ aversion to risky assets last year.
But stateside, investors stayed on the sidelines of healthcare partly because of a distinctly American risk: the 2020 elections. The widespread concern was that a Democratic candidate for president would implement a single-payer, government-run health insurance system and effectively destroy companies that have hitherto thrived in the private sector.
In Lakos-Bujas’ view, the worst of this political risk has now been priced into healthcare stocks, giving investors yet another green light to buy. He also noted that a Democratic president would need party majorities in the House and Senate to implement certain policies — and clean sweep at the polls is a high bar to clear.
With all these benefits of heathcare stocks in mind, here are some of Lakos-Bujas’ top recommendations of what to buy within the sector. They are pulled from a basket of Russell 3000 stocks that were ranked based on their cheapness and upside to …read more
Source:: Business Insider