Two Healthcare Stocks for a Tech Portfolio: A Value Investor's Diversification Strategy

For a portfolio built on the promise of technology, the healthcare sector offers a rare and valuable counterweight. It is a defensive diversifier, a place to park capital when the tech cycle turns. The thesis is straightforward: companies with wide economic moats and a history of compounding can provide resilience through market turbulence, offering attractive long-term returns when the broader market is volatile.

The sector's defensive attributes are not theoretical. They have been proven in the crucible of a difficult market. In 2022, when both equity and fixed income markets delivered negative returns, the healthcare sector outperformed the broader S&P 500 Index by a significant 15.8%. This resilience stems from the fundamental inelasticity of demand. People get sick regardless of the economic cycle, ensuring constant need for hospital care, treatments, and consumable products. This structural, noncyclical demand is further underpinned by powerful demographic and spending trends, like an aging population and persistent health spending, which create a durable growth runway.

The appeal of this defensive quality is evident in recent market shifts. In November 2025, as investors digested mixed economic data and evolving policy expectations, the sector's strength became a clear story. While the S&P 500 added just 0.25% for the month, health care posted the strongest returns of any major segment. This rotation away from narrow tech leadership toward broader market participation favored valuation-supported and defensive areas. The Morningstar Wide Moat Focus Index, which is overweight to healthcare, gained 1.53% that month, with the sector's rebound providing a meaningful tailwind. This performance highlights healthcare's current attractiveness as a place to find both safety and growth in a more uncertain environment.

For the value investor, this setup is compelling. It presents an opportunity to allocate capital to businesses that can compound through cycles, not just chase them. The sector's ability to deliver consistent results, as seen in companies like Johnson & Johnson and Abbott Laboratories, provides a foundation for long-term wealth creation that is less susceptible to the choppiness of technology-driven markets.

Company Analysis: Assessing Moats and Financial Quality

For the value investor, the search for durable wealth is a search for moats. In healthcare, two leaders stand out for their wide, defensible advantages. Both Johnson & Johnson and Abbott Laboratories possess moats built on intangible assets, the most powerful form of competitive advantage. As noted in a recent analysis, the 20 best healthcare companies to invest in have intangible assets that provide a wide moat, a category these two giants clearly occupy. For Johnson & Johnson, this includes a vast portfolio of patents across its pharmaceutical and medical device divisions, protecting its blockbuster drugs and innovative devices. Abbott, similarly, relies on proprietary technology and patents to defend its dominance in diagnostics and medical devices. This intangible fortress is what allows them to command premium prices and fend off competition, a critical trait for compounding through cycles.

Financially, both companies are built to last. Their businesses are not single-product plays but diversified engines spanning multiple resilient segments. Johnson & Johnson's structure is a classic example: its pharmaceutical division develops treatments for serious conditions, its medtech arm manufactures essential medical devices, and its consumer health products offer a steady stream of revenue. This diversification is a key strength, as it spreads risk across different regulatory and market cycles. Abbott operates on a similar model, with its pharmaceuticals, medical devices, and diagnostics divisions each contributing to a stable and growing revenue base. This multi-pronged approach ensures that a setback in one area is unlikely to derail the entire enterprise.

Perhaps the most tangible proof of their financial discipline and shareholder commitment is their track record as dividend payers. Johnson & Johnson is a Dividend King, a rare distinction for a company that has maintained an active streak of at least 50 consecutive years of dividend increases. The company's streak now stands at 63 years. Abbott Laboratories is no less impressive, boasting a 54-year streak of consecutive increases. These are not just payments; they are a pledge of capital return that has been honored through decades of economic change. For the patient investor, this consistency is a powerful signal of management's confidence in the business's long-term cash-generating ability and its commitment to rewarding shareholders.

The bottom line is that these companies combine a wide economic moat with financial quality and a proven commitment to capital return. Their defensive characteristics, highlighted in the sector's recent performance, are not accidental. They are the direct result of decades of building intangible assets, diversifying their businesses, and prioritizing shareholder returns. For a tech portfolio seeking a counterweight, they represent a classic value proposition: businesses with durable advantages that can compound wealth over the long term.

Valuation and Long-Term Compounding Potential

The defensive qualities of healthcare are clear, but the value investor must ask a deeper question: do current prices reflect the intrinsic value of these durable businesses? The evidence suggests the market may be underestimating the sector's growth runway, creating a potential margin of safety. While the sector's resilience was on display in 2022, the broader market backdrop of persistent uncertainty-inflationary pressure, elevated interest rates, and geopolitical concerns-has made finding attractive growth opportunities harder. In this environment, healthcare's dual role as a defensive stalwart and a source of structural growth becomes even more compelling. The sector's ability to compound through cycles is not a side benefit; it is the core of its investment thesis.

The key to long-term compounding lies in returns on capital and the ability to reinvest profits at high rates. For Johnson & Johnson and Abbott, their wide moats translate directly into this capability. Their intangible assets-patents, proprietary technology, and brand strength-create a moat that allows them to command premium pricing and defend market share. This pricing power is the engine for high and improving returns on capital, which is the lifeblood of compounding. The companies' diversified business models further strengthen this. By spanning pharmaceuticals, medical devices, and diagnostics, they spread risk and ensure a steady stream of cash flow that can be deployed across multiple growth vectors, from R&D to strategic acquisitions. This reinvestment capability is what separates a good business from a great one for the patient investor.

This analysis must be weighed against the need for growth, which means avoiding companies facing significant patent cliffs. The cautionary tale of Pfizer is instructive. Its shares have declined for three years, and the company faces significant patent cliffs over the next two years, including for Eliquis, its top-selling drug. The lack of near-term replacement candidates from its pipeline creates a clear headwind to growth and reinvestment. This is the antithesis of the value investor's goal: a business with a wide moat that can compound without a looming cliff. Johnson & Johnson and Abbott, by contrast, have broader, more diversified pipelines and product portfolios, reducing their dependence on any single blockbuster. Their financial discipline, evidenced by decades of dividend increases, signals management's confidence in their ability to generate and deploy capital effectively.

The bottom line is that the current market environment may be pricing healthcare with a defensive bias, overlooking its structural growth drivers. For the value investor, the opportunity is to identify the companies within the sector that possess both the wide moat and the financial strength to compound through the cycle. Johnson & Johnson and Abbott appear to fit this profile, offering a combination of resilience and growth that is hard to find elsewhere. Their valuation multiples, therefore, may not fully reflect the durability of their competitive advantages and their proven ability to reinvest for the long term.

Catalysts, Risks, and Implementation Strategy

For the value investor, the path forward is defined by monitoring the signals that confirm or challenge the thesis of durable compounding. The key catalysts are the tangible outcomes of the companies' wide moats: successful drug pipeline developments that replenish the revenue stream, strategic M&A activity that accelerates growth or diversifies risk, and continued execution in core business segments that maintains the financial discipline seen in their dividend streaks. Recent market dynamics highlight the importance of these factors. In November, the Morningstar Wide Moat Focus Index gained 1.53%, with healthcare's strong performance providing a meaningful tailwind. This was driven by top contributors like Merck and Amgen, which benefited from strong demand and pipelines. The broader market's rotation toward valuation-supported areas favored these defensive stalwarts, demonstrating how execution and pipeline progress can translate directly into shareholder returns.

The primary risks, however, are the inherent uncertainties of the healthcare cycle. Regulatory changes can alter the competitive landscape overnight, while patent expirations-like the significant cliffs Pfizer faces-create clear headwinds to growth and reinvestment. The most persistent challenge is the difficulty of predicting biopharma innovation. As seen with Vertex Pharmaceuticals, even a leader in a niche field can face clinical roadblocks that cause significant volatility. For Johnson & Johnson and Abbott, the risk is not a single cliff but the aggregate pressure of multiple patent expirations across their diverse portfolios. The value investor's moat is their best defense, but it is not a guarantee against these external shocks.

For implementation, the investor's watchlist should be simple and focused. Monitor quarterly earnings reports for signs of margin stability and the disciplined deployment of cash flow, which are hallmarks of a well-managed business. More importantly, watch for any shifts in the competitive landscape-whether through new regulatory rulings, unexpected patent challenges, or the emergence of disruptive technologies-that could threaten the intangible assets underpinning their wide moats. The goal is not to time the market but to ensure that the fundamental conditions for compounding remain intact. In a portfolio heavy with technology's promise, these healthcare leaders offer a counterweight built on resilience and a proven ability to return capital. Their long-term value will be validated by their consistent execution, not by short-term market noise.