2016 kicked-off with a huge dollop of uncertainty so buying stocks that are less positively correlated to the macroeconomic outlook could be a shrewd move. How so? If the global economy does endure a downturn then their profitability may come under less pressure than the majority of FTSE 100 stocks.
One sector that offers such an advantage is the healthcare space. Most pharmaceutical companies enjoy a relatively resilient revenue profile and therefore can be considered defensive stocks that can outperform a stale or falling index.
For example, shares in Alliance Pharma (LSE: APH) have risen by 9% since the turn of the year, which is 14% ahead of the wider index. As well as being a defensive play, Alliance Pharma continues to offer upbeat growth prospects with its bottom line expected to rise by 6% in the current year.
Clearly, this is an exciting time for Alliance Pharma since it recently announced the acquisition of the healthcare products business of Sinclair IS Pharma. The total cost is in excess of £130m and includes 27 products among which are five key growth brands that will significantly increase the scale of the business. Furthermore, it will increase the company’s footprint outside of the UK and provide a more diversified earnings profile that will enhance Alliance Pharma’s defensive appeal yet further.
With the company’s shares trading on a price-to-earnings (P/E) ratio of 13.5, they appear to offer good value for money and could continue to beat the wider index over the medium term.
Tough times set to change?
Making a much worse start to 2016 is AstraZeneca (LSE: AZN). Its shares have outperformed the index by just 1% and with earnings due to fall by 6% this year, many investors may question AstraZeneca’s defensive appeal.
Undoubtedly, AstraZeneca is undergoing a hugely difficult period at the moment, with its patent cliff still hurting profitability. However, with an ambitious acquisition strategy continuing to offer a bright long-term future, buying now could prove to be a shrewd move. That’s especially the case since AstraZeneca trades on a P/E ratio of 16.6, which given its rapidly improving pipeline indicates significant upward rerating potential. And with AstraZeneca yielding 4.2% in 2016, its appeal as an income stock remains high.
Defensive play
Also offering share price growth potential, even during a bear market, is generic specialist Hikma (LSE: HIK). It has a diverse global footprint as well as a range of treatments that mean its sales have been exceptionally consistent in terms of their growth in recent years. For example, revenue has risen at an annualised rate of 18.5% during the last five years and looking ahead, further sales growth of 43% is forecast for 2016.
Allied to this is an expectation of a rise in net profit of 16% this year. Due in part to this strong growth rate, Hikma trades on a price-to-earnings growth (PEG) ratio of just 1.4. This indicates that share price gains are on the long-term horizon. When combined with a beta of 0.9, this marks Hikma out as an excellent defensive growth stock.
