Inflation has been hogging the lime light for a while now and economists, investors and consumers are all talking about it.
While legislators are concerned about high inflation hurting the economy, consumers feel the pinch and investors get sleepless nights over a decline in return (inflation-adjusted) on their investments.
Each participant has a way to deal with inflation. While the government plays with interest rates to tame the same, consumers deal with it by paring their discretionary purchases. Investors can smartly ride the inflation wave by choosing inflation-hedged investments.
One of the best inflation-hedged industries is Healthcare. As demand for the same is mostly non-discretionary, the sector performs well even during high inflation. Thus, putting your money on healthcare companies with stable performances can help achieve good inflation-adjusted returns.
Inflation in the Crosshairs
Just for a quick review, Consumer prices (which tells about inflation) rose 5% in May, the largest annual jump in 13 years. Economists had expected inflation to climb 4.7%. Increase in spending as a result of pent-up demand, government’s massive stimulus measures and checks to Americans induced inflation.
Per the Fed, the spurt in inflation is transitory and will ease as the economic recovery gradually matures and the initial burst of suppressed demand moderates.
However, the real picture will be clear only in the subsequent readings. If inflation refuses to subside, then there remains a risk, of wealth erosion.
Add These Stocks to Build an Inflation-Hedged Portfolio
It is advisable for investors to cautiously position their portfolio to fight the inflation battle.
Therefore we pick four stocks from the healthcare sector that have a solid Zacks Rank and a Strong Style Score. Our research shows that stocks with a
VGM Score of A or B combined with a Zacks Rank of 1 or 2 (Buy) or 3 (Hold) offer the best investment opportunities. UnitedHealth Group Inc. ( UNH Quick Quote UNH - Free Report) is the largest entity in health insurance space (on the basis of market capitalization) and built a solid health service business named Optum to diversify its revenues.
United Health has a strong presence in many vertices of healthcare, such as health insurance, pharmacy benefit management, health-technology, data management, virtual healthcare. Its growing international business offers geographical diversification benefits. The company consistently keeps its costs under control, which reflects on its healthy margins.
A political support to making health insuranceaffordable for Americans will directly benefit the company. Its strong balance sheet with consistent cashflows is enough to back its growth strategies. Another attraction has been the double-digit increase in annual dividends for the past 12 consecutive years.
Dividend payment from the company is sure to continue, given its solid business. This can fetch another gain for investors apart from share price gains.
The stock has returned 687% in the past 10 years compared with the Zacks S&P composite’s rise 245%.
The stock carries a VGM score of B and a Zacks Rank #2 (Buy) at present. You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Encompass Health Corp. ( EHC Quick Quote EHC - Free Report) is poised for long-term growth on its expansionary plans to open inpatient rehabilitation hospitals, which will help it cash in on the growing aging population.
It plans to open six additional hospitals in 2021 and add above 100 more beds to its existing portfolio of hospitals. For 2022, the company plans to open at least 12 hospitals. Its strategy is to build six to 10 hospitals every year. Its expansionary plans will give it an edge in the highly fragmented inpatient rehabilitation industry. The company recently raised its revenue and earnings guidance for 2021.
Encompass Health’s favorable cash flow generation will boost its growth initiatives. It expects adjusted free cash flow to see a CAGR of 5-7% from 2020 to 2025.
The company’s optimistic forecast, solid cash flows and a growing business make it a perfect stock to bet on. Its dividend increased from 72 cents in 2013 to the most recent annual payment of $1.12 per share, which implies 5.7% growth per annum, on average. Its low payout ratio and decent growth indicate that the company is reinvesting profits in its business. This should pave the way for payout hikes in the future.
Also, from a valuation perspective, it is undervalued. Its P/EBITDA (TTM) of 9.89X is lower than the industry’s average of 16.3X. The stock carries a VGM score of A and is currently Zacks #2 Ranked.
Big hospital and clinic operator
Select Medical Holdings, Corp. ( SEM Quick Quote SEM - Free Report) is poised to grow on the back of its diversified business, improving top line, favorable cash flows, accretive acquisitions and partnership deal wins with various healthcare entities.
Its revenues and earnings have grown consistently over the past several years. Patient volumes are rising after remaining under pressure last year. This upside will aid revenues in turn.
The company is constantly generating favorable adjusted cash flow from operations, which has been increasing from the past many quarters. For the 2021-2023 time period, Select Medical is targeting a revenue CAGR of 4-6%, adjusted EBITDA in the 7-8% band and an EPS within 17-20%.
In the last eight years, the company’s dividend rose 2.8%, on average. Earnings per share continue to grow more quickly than dividends owing to hefty reinvestments in business. Evidently, this should continuously push up earnings, share price and dividends.
The stock carries a VGM score of A and a Zacks Rank of 2, currently.
DaVita Inc.'s ( DVA Quick Quote DVA - Free Report) consistently strong momentum with respect to the treatment of Chronic Kidney Disease and End Stage Renal Disease has been impressive for a while now.
Buyouts of several dialysis centers overseas are encouraging as well. Solid prospects in the Kidney Care wing, particularly within the United States, continue to aid the stock too. The company’s progress within DaVita Venture Group is also impressive. DaVita is steadily expanding in the international markets for geographical diversification. A solid guidance for 2021 is another positive. A stable solvency position is an added plus.
The stock carries a VGM score of B and a Zacks Rank of 2, currently.
Inflation is not an easy game to play but one can certainly tackle it by creating an inflation-hedged portfolio through well-researched investing.
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