It’s Alive! Here’s What Zombie Trumpcare Means for Investors
After a series of cliffhanger votes in the House and Senate, aggressive arm-twisting from President Trump, and a bombardment of special interest lobbying, it appears that Trumpcare is still alive. (Sort of.)
Vice President Mike Pence on Tuesday cast the tie-breaking vote to continue deliberations on the GOP’s sweeping health reform campaign known as Trumpcare. No Democrats supported the motion to proceed. After the vote to begin debate, the Senate considered a comprehensive replacement for the Affordable Care Act (aka Obamacare), but that fell far short of the votes needed to pass. The vote-a-rama continued on Wednesday, as the Republican-led Senate considered various measures to repeal and replace Obamacare.
The Senate’s efforts this week will either result in a measure that gets passed for the president’s signature or Trumpcare will remain dormant, neither dead nor alive. Republicans are determined to chalk-up a legislative win, so if they fail this time around, they could resurrect “undead” Trumpcare after the summer recess. To borrow the title of a James Bond movie, Trumpcare could go on to… die another day.
How’s an investor supposed to interpret this unholy mess?
Jim Pearce, chief investment strategist of Personal Finance, provides this insight:
“Whether Trumpcare eventually passes the Senate or not, medical equipment companies such as Johnson & Johnson should survive just fine, as demand for their products continues to soar regardless of politics.”
Jim also serves as chief of portfolio strategy for Investing Daily, the parent website for our entire family of publications. When he recommends a stock, it pays to listen.
Below, I explain why PF Growth Portfolio holding Johnson & Johnson (NYSE: JNJ) is one of your best health care plays, regardless of the zombie antics in the nation’s capital.
But first, let’s take a look at second-quarter earnings reports and what they portend so far. For the health care sector in general and Johnson & Johnson in particular, the numbers look good.
Second-quarter earnings on the upswing…
Better-than-expected earning reports this week have propelled the broader indices to new highs.
Among second-quarter scorecards to date, with 19% of S&P 500 companies reporting actual results, 73% have exceeded the mean earnings per share (EPS) estimate and 77% have beat the mean sales estimate.
So far, the blended earnings growth rate for the S&P 500 is 7.2%. Nine sectors are reporting or are expected to report year-over-year earnings growth for the quarter.
These strong operating results come amid a persistently overvalued broader market. The forward 12-month price-to-earnings ratio (P/E) for the S&P 500 is 17.8, which is above the five-year average of 15.4 and the 10-year average of 14.
As Jim Pearce observes: “Based on the forward P/E for the S&P 500 Index, it appears shareholders remain optimistic that these companies will be able to sustain strong earnings growth, despite the decreasing likelihood of a tax cut or infrastructure spending to boost the economy later this year.”
Among sectors, health care leads the pack in earnings surprises. The health care (100%), information technology (85%), and industrial (80%) sectors boast the highest percentages of companies reporting earnings that came in above estimates.
Johnson & Johnson: robust vital signs…
Which brings me back to Johnson & Johnson. Aging populations around the world and continued demand for health care, drugs and medical devices are tailwinds for Johnson & Johnson, a health care giant that makes medical devices and over-the-counter drugs.
Johnson & Johnson last week issued solid operating results for the second quarter of fiscal 2017. The company reported EPS of $1.83, beating analysts’ estimates by 3 cents.
Johnson & Johnson in June completed its $30 billion acquisition of Swiss biotech behemoth Actelion. Last week, JNJ management hiked its 2017 EPS guidance to a range of $7.12 to $7.22, up from a range of $7.00 to $7.15. The company also raised the low end of its full-year revenue forecast range to $75.8 billion from $75.4 billion.
Johnson & Johnson noted that revenue growth should accelerate in the second half of 2017 on strengthening demand for newer treatments such as cancer drugs Imbruvica and Darzalex. As “Big Pharma” struggles with expiring patents and the onslaught of cheaper generics, JNJ is betting on a new portfolio of costlier proprietary drugs to offset flagging demand for its older mainstay products such as diabetes drug Invokana.
With a robust dividend of 3.36%, JNJ should continue to provide steady income coupled with market-beating share appreciation. This diversified and vast (market cap $355.1 billion) blue-chip company is akin to a mutual fund of health and consumer markets.
JNJ’s consumer segment makes the products that are familiar to anyone who visits their local retail pharmacy, including Tylenol and Band-Aid bandages. The company’s medical devices division produces a range of products used by health care professionals in the fields of orthopedics, surgery, vision care, diabetes care, infection prevention, diagnostics, and more.
Johnson & Johnson is benefiting from economic recovery and also enjoys substantial pricing power, allowing it to charge more for its products without undermining demand.
The average analyst expectation is that JNJ’s year-over-year earnings growth will reach 6.8% in the current year and 7.5% next year. According to my calculations, JNJ is on track to achieve five-year earnings growth of at least 6.3%, on an annualized basis. Total return packages are rarely as enticing as Johnson & Johnson.
Got any questions or feedback? Send me a letter: email@example.com — John Persinos
This man has a million-dollar secret…
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