Market Insights & Analysis from Kramer Capital Research

A Health Crisis Makes Health Stocks Uniquely Crash Resistant

This week saw the continuation of the pattern we’ve seen throughout April, with stocks gradually digesting truly horrific economic data as the COVID-19 crisis unfolds.

The economic data remains nebulous. We’ve seen 22 million people laid off and early indications of a 12% decline in gross domestic product (GDP) in the current quarter.

But at least the medical situation finally seems to be plateauing. People with serious COVID-19 symptoms are no longer coming into emergency rooms at an exponentially increasing rate.

And with that in mind, it makes sense to start a defensive portfolio with the biggest health care stocks. After all, while the medical side of the economic landscape has been tested, the hospitals are holding up better than many investors feared.

We can’t gauge the economic dislocations that are ahead yet. However, we know the medical situation is already seeing daylight. That’s a great strategic argument for medical stocks.

America 2.0, Health Care Style

We’re going back to basics here and on my Millionaire Makers radio show over the next few weeks. Have you been listening? (Click here for recorded episodes and local stations.)

My recent discussion revolved around food and the retail channels that distribute it. We have the breadbasket economy covered.

As you know, I love the “Big Food” stocks and the smartest delivery networks. People have learned to eat at home. Many have stopped going out to shop, electing instead to have their groceries delivered.

Likewise, “Big Health Care” is in a relatively strong position as we look toward the post-COVID-19 economy. I actually see positive earnings growth for the sector this year.

Admittedly, margins are under pressure. It’s expensive to run emergency rooms in a pandemic. Discretionary medicine has been frozen in the meantime, locking down many once-profitable specialties.

But people will do what it takes to keep refilling prescriptions. I see health care revenue expanding 6% beyond its 2019 levels this year, which, again, is heroic stuff compared to a projected decline for the S&P 500.

I would not be shocked to see S&P 500 earnings plunge 15% this year, effectively erasing the benefit of the corporate tax cuts. That’s going to sting, but it’s far from the end of the world.

Either way, even a little positive movement will feel amazing in that environment. Outside Big Tech and utilities, everything else in the market is looking towards a year of stagnation at best.

We’re moving to the sidelines on large segments of the consumer discretionary sector as well as energy and a lot of manufacturing. Those stocks simply aren’t worth our attention right now.

Johnson & Johnson (NYSE:JNJ), on the other hand, is worth our interest. The stock is up 3% year to date (YTD) and yields 2.6% right now. This is enough to replace Treasury debt in part of your portfolio, while also providing you with a growth opportunity.

When 2021 rolls around, I see JNJ handing shareholders 18% year-over-year growth. That’s only a few months away, with that dividend justifying a little patience in the meantime.

UnitedHealth Group Inc. (NYSE:UNH) is also a decent alternative to Treasury bonds with a 1.6% yield. It is down only 2% YTD. Again, that’s remarkable resilience after the S&P 500’s 13% swoon.

It isn’t growing fast, but it isn’t collapsing either. These are the kinds of stocks that will form the backbone of my Value Authority as the year goes on.

And once you have the foundation in place, it’s time to reach for growth. That’s where Baby Biotech comes to the table. That’s what we’ll be talking about soon.

CANNABIS CORNER: STILL A LITTLE CROWDED

Pulling the plug on CannTrust Holdings Inc. (OTCMKTS: CNTTQ) has given surviving cannabis distributors a little relief.

Admittedly, CTST never accounted for even $80 million in annual sales, but simply relinquishing that slice of the global market gave the survivors the fuel to rally 4% this week. Aurora Cannabis Corp. (NYSE:ACB) and Canopy Growth Corp. (NYSE:CGC) did well.

Tilray Inc. (NASDAQ:TLRY) has been a true powerhouse, tripling in value over the past month. As the smallest of the “big three,” it has the most at stake here and the most to gain from CTST’s downfall.

Of course, TLRY has a lot of ground left to recover for shareholders. The stock has been battered. But, now we know it won’t be the first company to fall. That’s enough to keep hope alive.

And opening up an $80 million slice of the cannabis market is actually significant. The latest Canadian sales numbers I’ve seen have about $150 million a month flowing through this industry.

CGC has captured about 30% of that market. ACB and TLRY together have another 25% share. That leaves room for the giants to practically double by simply letting weaker operators fall along the way.

TLRY can practically hit its revenue growth goal for 2020 by simply absorbing CTST’s abandoned supply contracts. There’s plenty of room here for opportunistic expansion.

All management needs to do is keep executing on its plans, walking the tightrope between spending money to lock down long-term distribution deals and maintaining enough cash to keep going.

They don’t want to be the next cannabis stock to go under. I don’t think it will and neither does Wall Street.

Most of the other vendors in this space are tiny independent growers. They’re going to need capital they can’t find in this market environment.

This is the moment Big Cannabis was built to exploit. When we see TLRY, CGC and ACB start absorbing failed competitors, it will be time for investors to get off the sidelines and put money to work.

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