Global markets, including the ASX, have followed the lead set by the passage of the largest “stimulus” package in US history, have begun a multi-day upward trend. In three days, the Dow Jones Industrial Average rose 21%, roaring back into Bull Market status. The USD$2 trillion-dollar package passed in the US Senate and was passed by the US House of Representatives on 27 March.
Investor enthusiasm over the Senate package was enough to overcome the dire news released on 26 March that unemployment claims also set a historical high, reaching 3.3 million filers, with some experts expecting the unemployment rate in the US to hit 30%. That 3.3 million new filers eclipses the worst of the GFC in the US by five times.
In Australia the chief economist at Westpac is predicting an additional 814,000 Australians will join the ranks of the unemployed, raising the unemployment rate from 5.1% to `11.1%.
As one might expect, the debate over whether the stimulus package will be enough to stop the anticipated economic bloodletting has begun, with expressions of hope along with fears more stimulus will be needed. The US package is that country’s third, each increasing in size. Here in Australia we are on our second injection of funds into our economy. For the most part, stock markets around the world have followed the lead set by the US Dow Jones Industrial Average (DJIA) and the S&P 500. However, on 27 March the ASX opened in an upward trend looking forward to a fourth consecutive day of gains, but turned southward, falling into negative territory by midday and closed down 5.3%. In the US the DJIA closed down 4.06%.
Prior to the market reversals on the 27th dazed and confused retail investors may have been wondering if the worst was over, given the rallies in the US and on the ASX.
Here in Australia, company after company has withdrawn earnings guidance, leaving investors flying blind. One of the latest is one of our top gold miners, Northern Star Resources (NST).
The debate is likely to rage on until the ultimate calming catalyst – stabilization of the rate of growth of the coronavirus case – appears on the horizon. Yet even that is subject to debate as we are now being warned of possible “second waves” of the disease. Then there is the debate over the speed and breadth of the economic recovery once the “all clear” signal emerges.
In the midst of the confusion, investors who have been able to stay in the market and have resources to increase their holdings are taking notice of the “once in a lifetime buying opportunity” opinions. Insider buying in the US is sending a seductive signal.
Right now, there are some blue chip ASX healthcare stocks showing increased demand due to the virus that offer potential safety. Healthcare is the sector of choice for both safety and opportunity as stocks battered by the panic rather than the pandemic as well as those beaten down by the pandemic itself have the best chance of a quick recovery.
Of the beaten down choices, Ramsay Healthcare (RHC), Cochlear Limited (COH), and ResMed Inc (RMD) provide examples. Both Ramsay and Cochlear have withdrawn their 2020 guidance due to the uncertain impact of the coronavirus.
Elective surgeries and procedures around the world are being postponed to ensure hospital capacity. For Ramsay, elective surgeries are often more lucrative, and all Cochlear implants require non-essential surgery. ResMed provides sleep apnea equipment but generally an elective diagnostic sleep study procedure is necessary and required for reimbursement from Medicare or private insurance.
Ramsay and Cochlear are down more than 20% year to date, although Ramsay got an upward bump on 26 March when the company announced it was in discussions with Federal and State Governments to utilise Ramsay’s capabilities in the coronavirus response. In addition, the restrictions on two categories of elective surgeries have been put off until 1 April. From Reuters financial website:
Respiratory conditions along with weakened immune systems are two of the underlying health conditions putting people at risk of contracting the coronavirus. ResMed is a world leader in medical devices for respiratory conditions, but the lion’s share of its revenues come from sleep apnea and other devices for consumers. Its ventilator line for hospital use contributes about 10% of company revenues. However, the share price bounced into positive territory on 27 March on the news the company had already received a government order for 1,000 ventilators and was “working with governments, health authorities, hospitals, physicians, and patients worldwide to assess their needs, and to deliver the ventilation therapy that is essential to treat the respiratory complications of COVID-19.”
ResMed management acknowledges a slowdown in diagnostic testing for sleep apnea devices for new patients.
Fellow producer of sleep apnea equipment, New Zealand based Fischer & Paykel (FHP) has prospered in the current crisis due to its extensive line of Hospital respiratory treatment products. The global demand for these products is up and the company has increased its manufacturing capacity. In contrast to the stampede of Australian companies rushing to downgrade their 2020 guidance, on 17 March Fischer & Paykel upgraded its guidance, benefiting from higher exports of its hospital products and the weaker New Zealand dollar.
Sigma Healthcare (Sigma) is another ASX healthcare stock showing year to date share price appreciation in the midst of market carnage.
As more information about the coronavirus comes out, consumers everywhere are learning underlying health conditions put younger age groups at risk, not just the elderly. Sigma Healthcare and others in the pharmaceutical sector are reporting demand increases rivalling the panic buying seen in grocery stores, as consumers look for anything that might improve their health. The Federal Government has stepped in and set limits on the sale of some prescription medications as well as some over the counter and other products.
Sigma products are found in pharmacies and grocery stores and include treatments for respiration and diabetes as well as standard cold and flu remedies. The company also wholesales its products to more than 4,000 Australian pharmacies through its network of 13 distribution centers. In addition, Sigma supplies hospitals in NSW with and is expanding its hospital distribution services into a national network.
The stock price got a much-needed boost on 18 March when Sigma announced the renewal of a distribution agreement to supply all over the counter and pharmaceutical products to the Pharmacy Alliance (PAL) Group. The agreement is for 5 years, with a five-year extension option. The company took a beating in 2018 when it lost a major contract and then rejected a takeover bid from Australian Pharmaceutical Industries (API). Revenue and profit have been dropping since, with declines of 18% in revenue and 131% in profit for FY 2020, but guidance for FY 2021 call for 10% growth. The company is undergoing a business transformation effort called Project Pivot.
Fellow pharmaceutical supplier and nutritional health provider Blackmores Limited (BKL) have seen double digit share price declines year to date and may present potential buying opportunities.
Australian Pharmaceuticals is our largest wholesale distributor of pharmaceuticals and allied health and beauty products. The company’s Priceline Pharmacy chain boasts about 500 stores across Australia with 1500 members in its retail pharmacy program. In a March trading update the company stated:
- This month we have witnessed unprecedented demand for PBS (Pharmacy Benefits Scheme) and other medicines through the pharmacy supply chain. Demand during March is in excess of 50% more than usual for this time of year.
API has a solid history of dividend payments, with average growth over five years of 17.2% and 13.4% over ten years. The current fully franked dividend yield is 6.4%.
Blackmores has 23 product categories, including a probiotic for improving immune system defence and multivitamin and cold and flu products for immunity. The company also offers pet health products. Like API, Blackmores has an enviable track record of dividend growth, with five-year average growth of 11.6% and 7.8% over ten years. The current yield is 3.3%, fully franked.