“The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.” — Warren Buffett
During the season opening baseball game for the Seattle Mariners, the Make-a-Wish Foundation blessed a young boy who has fought cancer at Seattle Children’s Hospital for years with a run around the bases. The Fred Hutchinson Cancer Research Center also honored a lady who successfully used recent treatments to beat cancer. It was heartwarming and a reminder of what fantastic things are being done in medicine in the United States.
What they didn’t do that night was flash the cost up on the big screen of the young boy’s medical care at Children’s Hospital or the money spent at the Fred Hutch to put this lady’s cancer into remission. The President didn’t tweet anything about how high the drug prices were. Amazon didn’t make any new announcement attacking the health-care industry. Why are we happy about good outcomes, but turn right around and beat up the companies that are making these wonderful breakthroughs possible?
To quote Buffett, “the future is never clear” about the health-care industry. We believe the uncertainty in this part of the stock market is producing behavior that is “the friend of the buyer of long-term values.” Let’s consider what we’ve known historically and what we know right now:
Health Care Normally Carries A Great Deal Of Good Will
Investors in pharmaceutical and biotech companies have historically carried a bit of a halo. Peter Lynch argued to watch what goes on around you and invest in things you understand. If you are taking a prescription that is making you feel better or get medical treatment that improves your life, it is pretty easy to think that thousands of other people are gaining the same benefit.
Health-care companies overcome great risks to succeed, but can gain incredibly profitable businesses in the process.
It takes over one billion dollars to create a blockbuster drug through chemistry or biotechnology. Most of the development ends in failure. The highest research and development budgets in the United States are attached to the major pharma/biotech companies. Success breeds success, because the money you make on prior successes funds the R&D budget to find future successes. Does the government want to come up with the billions of dollars needed to improve our health or do they wisely want it done in the for-profit sector?
Relative To The S&P 500 Index And To The Average Stock, We Believe These Stocks Are Bargains
The health-care companies we are researching have better histories of profitability, stronger balance sheets, better free cash flows, more shareholder friendliness and have seen stronger insider ownership in the large-cap sector of the U.S. stock market than other sectors. It is rare for these companies to be avoided by investors who focus on quality and future growth.