Health care stocks may be the next big winners as inflation cools and Americans opt toward spending on surgeries and elective procedures. Jeremy Bryan, Gradient Investments Senior Portfolio Manager, shares his forecast on stocks in the health and pharmaceuticals space, while highlighting performances from Oracle and W.W. Grainger.
Video Transcript
DIANE KING HALL: Stocks are on the rise in today's trading session after producer price index provided further evidence of inflation cooling. This coming as companies start earnings season stronger than analysts' expectations. So what stocks should investors get in? And which should you wait on the sidelines for?
Here to discuss, we have Gradient Investments Senior Portfolio Manager Jeremy Bryan. Jeremy, thanks so much for joining us. Let's start with your picks. You're starting with the health care space with Abbott Laboratories. Tell us the thesis on this one.
JEREMY BRYAN: Yeah. Health care in general has kind of been left to the sidelines a little bit after admittedly a very strong 2022. But especially with Abbott, what we're starting to see here is a re-acceleration of growth is, you know, Abbott had a huge influx because of COVID conditions, where elective procedures went away but you had testing and all the other stuff that they were involved in. And so it made the earnings trajectory pretty noisy, because you've had a pretty significant correction of earnings here. They're expected to be down.
But what we're starting to see is a re-acceleration of that profile. As the COVID thing start to end off, they're getting those elective procedures back in. And then secondarily, the diabetes franchise is actually had some technology improvements here recently that could actually increase their penetration rate there, too.
So we really think that this is a re-acceleration story. It's not cheap, but it's cheaper than it has been in the past. And that's why we own it now. And we'd be buying here.
ALEXANDRA CANAL: Now why do you think Abbott Labs is more of a pick than, let's say, a Johnson & Johnson, for example? Because we have seen Abbott Labs kind of relative to their peers lag a bit.
JEREMY BRYAN: Yeah. I mean, well, Johnson & Johnson especially, you know, they had the KVUE spinoff, and they have other components of their business, right? It's a pharma business. And then the device is business as well. So I mean, Johnson & Johnson, to a certain extent, is a little different from what people look for and invest in there, because they're probably honestly talk about pharma more than they talk about the devices component of Johnson & Johnson.
But really, from that perspective, too, is that some things in health care have worked OK. I mean, if you look at Boston Scientific, that stock has been phenomenal. But then other areas have really just been left behind. And to a certain extent, I think it's, again, a source of funds for what has worked well this year, which is, you know, the AI stocks and those kinds of things. And industrial reopening, I think people are pivoting out of that.
But again, from our perspective, it-- that is actually providing the opportunity to say now is an interesting time, because you're getting a little discounted valuation. It's been kind of left to the sidelines. And we do think that earnings growth is going to accelerate in the next couple of quarters.
DIANE KING HALL: All right. You called Abbott at around-- I mean, today, it's around 107 that I guess it might be pricey. But your next pick is UnitedHealth Group. That's certainly pricier. What's the case for that?
JEREMY BRYAN: Yeah. And we'll find out a little bit more real soon here. But from the perspective of UnitedHealth, you know, I just think insurance stocks are-- you know, UnitedHealth is probably the one that's trading the most expensive, but it's also the best executer in that group. But I just think health insurance is actually one that's been materially left behind here recently. And Cigna is another one I would call out in that regard.
And both of these companies are going to grow and probably the high-single digit to low double-digit EPS range for the next three to five years. And we're paying a pretty significant discount to their long-term valuations here, especially with UnitedHealthcare again. That one's a little bit more expensive. But I'm willing to pay up a little bit for the growth. But if you're looking for like a true value play, that would be more of your Cigna.
But I just think UNH and Cigna have been left behind because of these elevated concerns about their cost environment. We think that's a little bit overblown. UNH has already called it out. We'll see what the earnings reports show. But because they already kind of put in there, we think that's already somewhat priced in unless the numbers are significantly worse than anticipated, which we don't see right now.
DIANE KING HALL: OK. I'll try to do this quick, because I kind of have a two-pronged question now. So we know United lost some steam this year because of them coming out and talking about the rise of elective-- elective surgeries and how that can pressure their margins. What are you looking for from the earnings tomorrow in terms of that, what their margins look like?
JEREMY BRYAN: Yeah. You know, I mean, honestly, it's more important to me the commentary. I want to say that, you know, if they come out cautious and say things are getting-- you know, we've seen progression that it's getting materially worse, that would obviously be a little bit more of a red flag for us. But if they're saying the exact same thing that they already said in mid-June-- and by the way, they don't bring guidance down significantly as a result of that-- that would give us an indication that they are at least comfortable with their level of increased cost, and that the pricing environment will be positive enough for them to continue to grow that earnings in that double-digit clip.
But that's really what we're looking at is, what's the commentary with regard to the cost environment? Is it getting worse than when they talked about it before? Is it starting to alleviate? Where are we at in that cycle, if you will?
ALEXANDRA CANAL: And Jeremy, you also have some stocks that you're saying to stay on the sideline. One of them being Oracle, why do you think that?
JEREMY BRYAN: Yeah. Oracle's one we just sold this week. And it's really-- this is more of a profit-taking move. And if you're a new entrant into it, I wouldn't be buying it now. So we sold it this week. I mean, we bought it in October and get 85% out of it. I mean, that's, you know, phenomenal in any stretch., in anything that we'd be looking for.
But you've gone from when we bought it, it was 13 times earnings. Now, it's over 20 times earnings, which is near a 10-year high for that stock. So we're just saying from our perspective, now is probably not the time to be entertaining a buy-in in Oracle with this significantly higher multiple. And we still don't know what the extended benefit of AI. We actually think they will be an beneficiary to a certain extent. But we don't know how far and how fast that goes. And they've been rewarded for a lot of that already.
So that's why we're saying that, hey, fundamentally, there's really not much wrong with the company. But if I'm buying a position today or if I'm holding it today, I'm saying that maybe it's a little bit expensive. And I'd maybe want to look to other avenues for future growth.
DIANE KING HALL: So that's interesting. You do have a bunch who agree with your thesis on Oracle and a bunch who don't. It's kind of like almost split down the middle. So we'll see where that one ends up. What else are you staying away from, Jeremy, or getting out of?
JEREMY BRYAN: Yeah. You know, I mean, honestly, we're again looking a little bit at these industrial plays. And we're just, you know, Fastenal is an interesting example of that today. So I'm going to pivot a little bit here and saying, we've been talking about this before and saying the industrial renaissance in US manufacturing is real. There's no question about it. But we were a little bit nervous about how far and how fast some of these industrial names have come.
And so Fastenal was an interesting thing today and the effect that numbers weren't that bad, and the stock has had a rerating downward. And its peer competitor Grainger was another one in that regard that actually had a downgrade this week as well. And so from that perspective, we're just saying be careful with these types of names that have run really far really fast recently here on the thought of US manufacturing renaissance and those kinds of things occurring, because while we do think that is occurring, we just thought this was too far too fast.
And so both of those names were on our list and saying we just need to be careful here. It's not a name we'd be entering in right now. We'd want to see it settle down and kind of come back to an area where the valuation makes a little bit more sense for the opportunity going forward.
DIANE KING HALL: All right. Jeremy Bryan, we got to leave it there. Thank you so much.
