The healthcare sector is usually a sleepy performer, but in this market turmoil, it could prove to be one of those that are not only safe in the third quarter – but bullish. chief. The third quarter could be a tumultuous time, after the worst first half for stocks since 1970. As investors fear rampant inflation and the Federal Reserve overshoot, they’re looking Look for places that can still generate some profit and income. The steady earnings strength and dividend quality of some healthcare companies can be a welcome haven for investors. The broad healthcare sector is one of three investment ideas chosen by analysts for its ability to perform well during the summer months. The others are bank stocks and companies that generate lots of free cash flow but are unpopular in that investors are shorting them. According to the CFRA, the healthcare and biotech sectors have traditionally performed better in the third quarter of the midterm election year. Despite regulatory concerns, the sector remained an island in a stormy quarter. The S&P healthcare sector has outperformed the S&P 500 this year, losing nearly 21% in the first half of the year. During the same period, the healthcare sector fell only 9%. In the second quarter, the healthcare SPDR Fund, which represents the S&P healthcare sector, fell 6.4%, while the S&P 500 fell 16.4%. Historically, healthcare was the best-performing major sector in the third quarter of midterm election years. Back in 1990, the sector itself was up 4.4% in those quarters, compared with the S&P 500 average decline of 1.8%. CFRA data also shows that among the S&P sub-sectors, the best performing was tobacco, which grew 6.4% in the third quarter of the midterms. But all other active sub-sectors fall under the healthcare sector. That includes healthcare facilities, up 6%; pharmaceuticals, up 5.1%; healthcare equipment, up 2.1%; healthcare distributors, up 2% and supplies, up 1.8%. Getting ready for the third quarter Navigating the third quarter after a rough start to 2022 Wall Street’s top strategists see the stock market recoiling most of year-end losses These stocks have With a strong uptrend in the second half of the year, Wall Street analysts say Sam Stovall, CFRA’s chief investment strategist, has identified a number of companies in the healthcare sectors that investors invest in. may want to consider. They include HCA Holdings; Pfizer; Tandem Diabetes Care; Patterson Cos; Align Technology and Walgreens Boots Alliance. David Bianco, Regional Investment Manager for the Americas at DWS Group, said he also sees an opportunity in healthcare and is most interested in this area in his DWS Sector Strategy Fund. “We see it as growth at a fair price, without the risk of higher interest rates,” he said. “That includes pharmaceuticals and biotechnology.” Biotech has been beaten to high-growth names, and both Stovall and Bianco say it’s time for a rethink. The IShares Biotechnology ETF has dropped to a low, but it is still far below the 52-week high of $177.37 per share. Bianco said the names he is taking too seriously in the biotech sector include Abbvie and Amgen. In the most recent CNBC Delivering Alpha survey, 58% of investors said healthcare should be among the biggest winning areas by the end of 2022. CNBC surveyed around 500 investment executives Stock strategists, portfolio managers and contributors to CNBC money management, in a survey last week. Energy tops the list with 68% expecting it to be one of the best performing and third is the financial sector with 34% expecting the sector to do very well. Banks are not the culprit this time around Bianco is one of the supporters of certain financials and he expects bank stocks to do very well later this year. He likes big banks JPMorgan, Wells Fargo, Bank of America, Citigroup as well as PNC Financial. “Their returns are driven by short-term interest rates, not the shape of the yield curve,” said Bianco. If there is a recession, it won’t be the banks, he said, unlike 2008. “We don’t expect a credit crunch like this.” Besides banks, he also likes insurance companies, like Chubb and Marsh & McLennan. When in doubt, look for cash flow Julian Emanuel, Evercore ISI’s head of equity, derivatives and quantitative strategy, says he’s looking across all sectors to find stocks that have characteristics that can help them weather both inflation and a weak economy, but also perform better. First, companies must generate a lot of free cash flow, and they must be stocks that are heavily sold short. “It is said that cash is a liability in a high inflation environment,” he said. Emanuel has created a list of companies that fit his criteria with a market capitalization of over $5 billion. He also picked companies that didn’t hit a new June low, unlike the S&P 500. The list includes a mix of sectors. The energy names on the list are among the companies that generate the highest free cash flow. For example, Occidental Petroleum is expected to have free cash flow of 25.5% and Ovinitiv is expected at 24.7%, according to Evercore estimates. Custom consumer names are also included in the list. Dick’s Sporting Goods estimates free cash flow of 16.3% and luxury retailer Capri Holdings, 12.7%. Capri owns the Jimmy Choo and Michael Kors brands, among others. Also on the list is Omega Healthcare, with an estimated free cash flow of 12.3%. REITs operate with assisted living amenities.