Morningstar Advisor - Summer 2008 - (Page 76)

Screens Health Care Provides Shelter from Economic Storm By Damien Conover Use this screen to find the best of health-care stocks, which historically tend to perform independently of the economic cycle. Over the past several recessions, health-care stocks haven’t skipped a beat and have shown strong resilience to a slowing economy. As the U.S. economy approaches a recessionary period, several health-care stocks should again generate consistently strong growth. While uncertainty remains to the degree and length of the impending recession, healthcare stocks as a whole should perform well regardless of the severity of the downturn. Our analysis shows that over the past several recessions, health-care stocks showed very minor correlation to the economy’s growth. (See Sector Rap, “Is Health Care Immune to a Recession?,” in the Spring 2008 issue of Morningstar Advisor for more on this topic.) We believe that the inelastic nature of healthcare goods and services keeps demand high even when consumers face declining disposable income. Further, a large amount of health-care spending is composed of insurance payers, which shields consumers from the majority of expenses. Therefore, health-care stocks should offer a viable option in a slowing economy. Morningstar tracks more than 1,000 healthcare stocks, however, and sifting the winners from the losers is a challenge. Not all health-care stocks will perform well in recessionary periods. Further, many health-care stocks face company-specific risks that reduce the stocks’ return potential. This screen seeks health-care stocks with the highest return potential in a slowing economy. We performed this screen in May in Morningstar Principia with April month-end data. An equivalent screen can be created in Morningstar Advisor Workstation Office Edition. Initially, we want to group only the health-care companies out of the total stock universe: Sector = Healthcare Second, we want to avoid small companies, where slight missteps are magnified in a weakening economy. Lacking the diversity of several operations, small firms tend to focus on particular niche industries. In a weak economy, a small company’s sole business line faces a greater risk of reduced demand. Without the stability of multiple operating divisions, any problems arising to the core business may result in the need to raise capital to get past the rough patch. In a recessionary period, generating additional capital through equity offerings can greatly dilute the existing shareholder base. As a result, we want to 76 Morningstar Advisor Summer 2008

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2008

Morningstar Advisor - Summer 2008 Contents Letter from the Editor Contributors Inbox College Planning: Solutions and Concerns ETFs: The Next Chapter Engineering Financial Advice Investment Briefs Flexible vs. Style-Pure Managers: The Evidence Forging a New Commodity Index Work Your Way Through College Planning Sizing Up the Options Best and Worst 529 College-Savings Plans A 529 Travel Guide 10 Tax-Smart Tips for College-Savings Planning Global Dialogue How Sequoia Cranks Out Good Returns Year After Year The Many Layers of David Winters Living on the Edge Stocks to Buy Once a Decade With Munis Feeling the Pain, Some Opportunities Arise Health Care Provides Shelter from Economic Storm Help Your Clients Get More Out of Their Bond Portfolios Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar New on MorningstarAdvisor.com Closer to Fine

Morningstar Advisor - Summer 2008

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