Two Healthcare Stocks for a Tech-Heavy Portfolio: A Value Investor's Diversification Play

For a portfolio dominated by technology, healthcare offers a classic value investor's anchor: a defensive, low-correlation holding that can weather market cycles. The thesis rests on a simple, historical pattern. For three decades until 2020, US healthcare stocks generated roughly the same returns as the tech sector, but with much less volatility. While tech has since pulled ahead, the sector's recent stagnation has created a rare opportunity. Today, healthcare trades at a historic valuation discount, offering a compelling entry point for patient capital.

The numbers underscore this setup. The global healthcare sector discount to global equities remains at a historic low of -2.4x, a level seen only twice in the last two decades. This deep discount, coupled with low expectations, has created a coiled spring. The spring has already begun to release. In the third quarter, the U.S. healthcare sector delivered the second-highest year-on-year revenue growth within the S&P 500, with 10.4% revenue growth that bested expectations. That earnings-driven strength has powered a tangible outperformance, with global healthcare stocks outperforming the broader market by 7% since a low-valuation call was made four months ago.

Viewed another way, healthcare's defensive qualities are now intertwined with a potential catalyst for renewed growth. Structural tailwinds-aging populations, higher per-capita medical spend, and the potential for AI to accelerate drug discovery-are aligning. For the disciplined investor, this combination of deep value, recent momentum, and long-term resilience makes healthcare not just a diversifier, but a potential compounder in the making.

Becton Dickinson: The Wide Moat, High-Quality Compounder

For the value investor, Becton Dickinson represents the ideal compounder: a company with a wide economic moat, a history of reliable returns, and a defensive profile that acts as a portfolio ballast. Its core business-manufacturing essential medical technology products like syringes, infusion systems, and diagnostic equipment-creates a durable competitive advantage. These are non-discretionary items used in hospitals and clinics worldwide, meaning demand remains steady through economic cycles. This translates directly into pricing power and predictable cash flows, the hallmarks of a wide moat. As Morningstar defines it, this is a company with a durable competitive advantage that allows it to earn excess returns on capital for a long period.

That moat has been consistently rewarded with shareholder returns. Becton Dickinson boasts a strong track record of increasing its dividend, a key signal of financial health and management's confidence in future earnings. The stock currently offers a forward annualized dividend yield of 2.1%, supported by a history of consistent increases. For a patient investor, this provides a tangible return while waiting for the underlying business to compound. The company's focus on high-quality, essential products insulates it from the volatility that plagues more cyclical industries.

This defensive quality is its most valuable attribute in a diversified portfolio. When broader markets turn sour, the need for medical supplies does not diminish. This inelastic demand, as noted in the sector's traditional defensive role, means Becton Dickinson's stock is likely to fall less than the market in downturns. It provides a crucial buffer, reducing overall portfolio volatility. In a tech-heavy portfolio, where sentiment can swing wildly, this steady, high-quality compounder offers a counterweight. It is not a speculative growth play, but a reliable engine for long-term capital preservation and growth, perfectly aligned with the value investor's discipline.

Merck & Co.: The Pharma Giant with a Pipeline Moat

For the value investor, Merck & Co. embodies the classic defensive compounder with a wide moat anchored by a blockbuster drug and a deep pipeline. Its core strength lies in a durable competitive advantage that allows it to earn excess returns, primarily through Keytruda, the world's best-selling cancer immunotherapy. This drug, along with a robust pipeline of other therapeutics, creates a powerful economic moat. It is a wide moat not just in the present, but one that is being replenished, providing a long runway for future cash flows. This is the essence of a business that can compound capital over decades.

That moat translates directly into a history of reliable shareholder returns. Merck is a dividend aristocrat, a company with a track record of increasing its dividend for 25 years or more. This discipline signals management's confidence in the business's ability to generate consistent earnings and cash flow. For a patient investor, this provides a tangible, growing income stream while the underlying business compounds. The company's focus on essential medicines insulates it from the volatility of more cyclical industries, a quality that has proven valuable in shifting market conditions.

This defensive character was on clear display in November. As the market rotated, Merck emerged as a top contributor to the Morningstar Wide Moat Focus Index, which gained 1.53% for the month. Its performance stood in contrast to the broader market's modest gains and highlighted the sector's strength. In a portfolio heavy with technology, where sentiment can swing wildly, Merck's ability to hold its ground-or even advance-during rotations provides a crucial buffer. It is not a speculative growth play, but a steady, high-quality engine for long-term capital preservation and growth, perfectly aligned with the value investor's discipline.

Implementation and Portfolio Integration

For the disciplined investor, the thesis is clear: healthcare offers a rare combination of deep value, defensive qualities, and a potential catalyst for renewed growth. The actionable step is to allocate a portion of tech-heavy capital to this sector to reduce overall portfolio volatility and correlation to growth stocks. This is not a trade for short-term momentum, but a strategic move to build a more resilient, long-term compounder.

The key metrics to monitor are straightforward. First, watch the sustainability of the earnings growth surprise. The sector's 10.4% revenue growth last quarter was a powerful catalyst. The thesis depends on this momentum continuing, driven by inelastic demand for essential products and services. A sustained beat on earnings estimates would confirm the coiled spring is releasing, while a return to stagnation would signal the opportunity has passed.

Second, remain vigilant for policy shifts that could impact margins. The sector's recent outperformance has been aided by a rotation toward defensive areas, but its long-term compounding power hinges on stable operating conditions. Watch for changes in drug pricing regulations, reimbursement policies, or the implementation of tax incentives like the One Big Beautiful Bill Act that affect R&D costs. These are the frictions that can erode the wide moats of companies like Becton Dickinson and Merck.

The long-term focus must remain on compounding dividends and earnings. Treat short-term price movements as noise. For Becton Dickinson, the goal is to see its forward annualized dividend yield of 2.1% grow steadily, supported by its durable competitive advantage. For Merck, the focus is on the pipeline replenishing the Keytruda moat and sustaining its dividend aristocrat status. Their recent performance, like Merck's role as a top contributor to the Morningstar Wide Moat Focus Index in November, is a positive sign of portfolio resilience. But the real test is decades of consistent returns, not a single month's gain.

In practice, this means viewing these healthcare holdings not as speculative bets, but as essential ballast. They are the steady, high-quality engines that allow a portfolio to compound through cycles, providing a crucial counterweight when the tech sector's volatility surges. The patient investor's edge is in staying the course, letting the moats do their work.