At a moment when it feels like the Fed could raise interest rates to slow the U.S. economy, Jim Cramer has now become interested in stocks that could deliver growth for investors—even when the economy slows down.
That is why this week the "Mad Money" host has been all about healthcare stocks. It has been one of the most consistent groups out there, and money managers will pay big bucks for consistency.
But Cramer sees there is one group that is even better than a regular healthcare company—the healthcare roll-up. These are the consolidation companies that use serial acquisitions to fuel rapid growth.
"The great thing about this model is that serial acquirers can keep growing as long as they can keep doing deals—they're not hostage to the vicissitudes of the economy, and that goes double if they're operating in a secular growth sector like healthcare," Cramer added. (Tweet This)
Why is the business model of a drug company so compelling?
Unlike other industries, when a new product is invented in the pharma space, it has a limited lifespan. Patents on drugs typically only last around 20 years, but it takes a really long time to develop the drugs and get them through the FDA approval process.
But as soon as the drug loses patent protection, revenues practically disappear overnight as generic competitors with lower price points come out to feed.
"That is why drug companies cannot afford to rest on their laurels. They're like sharks—they have to keep swimming forward or they'll die," Cramer said.
To start, there is Actavis, which will soon change its name to Allergan. Actavis' stock has been on fire recently, up 47 percent in the past 12 months and has more than tripled in the past three years. The secret to its success? The pharma roll-up.
Actavis likes to make big, high-quality purchases, which have proven very successful. In 2013 it bought Warner-Chilcott, allowing it to construct a tax-inversion deal that changed its domicile to Ireland and gave it lower tax rates.
"I think the Allergan acquisition will work out just like Actavis' previous incredibly successful deals, making this company a specialty pharma titan. Plus, the stock is darned cheap, trading at just 14.2 times next year's earnings estimates," Cramer added.
Next up is Horizon Pharma, which is up more than 100 percent year-to-date. Cramer considers the $5 billion market cap company to be a miniature, early innings version of Actavis. It has a similar mindset, and also prefers to go for the big, high-quality acquisitions.
Mallinkckrodt is another stock that has been blazing hot ever since it was spun off from Covidien about two years ago. It was neglected for years, but since it became an individual company, it is one of the most acquisitive pharma players out there.
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Finally there is Valeant, which has rallied 64 percent year-to-date. This company is all about quantity, as on average it makes about 25 acquisitions per year. Wowzer!
Valeant has a reputation of buying other drug companies, and then cutting down the research and development budgets down to boost margins. And while some have criticized the model, it certainly works for shareholders.
So in an environment where it is clear that a rate hike is coming to slow the economy, Cramer considers these four pharma plays to be in a sweet spot that could continue to grow your portfolio.