Corporate America has a growth problem. Earnings have outpaced sales at a ratio of nearly 5-to-1 since 2008, according to Strategas Research Partners.
Sales represent dollars coming through the front door, whereas earnings correspond to profits after taxes, depreciation, amortization and any number of other items which can skew growth...like share repurchases. It's why we prefer looking at top-line growth to bottom-line results. We appreciate an effective chief financial officer, we prefer an effective sales force.
This differential between earnings and sales growth is one reason corporate profitability has soared to a record 14.9 percent. Managers have brilliantly trimmed costs to maximize margins, presumably because they suspected sales growth would be hard to come by in a sub-par economic recovery.
In spite of the broad trend, one group has consistently grown its top line over the past three years: Health-care stocks. This is due largely to broader insurance coverage under the Affordable Care Act and the aging population of baby boomers. In other words, more customers paying for health care...that's top-line growth. Based on consensus estimates compiled by Bloomberg, the trend will continue in 2014.
Investors can participate via one of the several exchange-traded funds that focus on health care. We chose the SPDR S&P Pharmaceuticals ETF (Strategas Research Partners ) since it includes many of the highest-growth companies in the sector. It has risen 51 percent during the past year, well ahead of the S&P 500, which gained 18 percent. We believe this outperformance will continue.
For readers who prefer individual companies, we include the five health-care companies forecast to grow sales the fastest this year:
Gilead Sciences Inc. (XPH ) 48%
Actavis Plc (GILD ) 35%
Alexion Pharmaceuticals Inc. (ACT ) 35%
Regeneron Pharmaceuticals Inc. (ALXN ) 31%
Forest Laboratories Inc. (REGN ) 27%