Hello volatility. It was another wild week for the market, with stocks posting their first 3-day drop in nine months before rebounding on Friday to ease the pain.
The only sector that finished up on the week was energy, lifted by the biggest move in crude in over two years.
The theme remains the same. The Middle East is spinning out of control.
But the reaction was a little different this time; the market took a more tepid approach to risk and the unknown. A lot of big-time players took profit on long-standing winners with the averages at a 2-year high and shifted into new segments of the market.
Averages Down, Energy Up
That dynamic weighed on the broader averages but sent energy stocks jumping higher, with investors loading up on the energy trade ahead of spring and summer.
That’s what happens when crude jumps $12 in one week, its biggest move in almost two years.
You can almost immediately place a 10%-15% premium on every major energy company in the world that controls the resources and production. It’s a powerful investment strategy.
But by the end of the week the bargain hunters had risen to the surface, buying big blocks of stocks that looked cheap compared to only a week ago. That and a bullish read on consumer sentiment helped the market exit the week on an optimistic note that in spite of ongoing political unrest in the Middle East and rising energy prices, people will find a way to spend and the government will do everything it can to support that.
Where is the Growth?
So with an eye to growth, let’s go ahead and talk about another one of our favorite sectors.
Healthcare.
Don’t everyone jump for joy at once; I know healthcare is really fun to talk about. But everybody needs to pay attention to this conversation because there are some important trends in play.
2 Most Important Trends in Healthcare
The first trend is the governments growing involvement in the market. Like it or not, it’s a fact. With Medicaid and Medicare looking at adding millions of enrollments in the next two years, more people are going to have access to healthcare and healthcare resources. More visits to the doctor, more prescriptions, more pills, more major, minor, invasive and exploratory surgeries. That’s called aggregate demand, and it’s going to be on the upswing because of these Federal Dollars supporting the market.
The second trend is the aging domestic population. This is nothing more than a demographic trend, en masse. Baby boomers are on the front end of a healthcare consumption curve that we’ve never seen before. “I’ll take one new hip, a fresh knee; tear out some of that loose cartilage, and bam, who’s ready to hit the slopes?”
And make sure he has six months of pills to go along with that, because we wouldn’t want this poor guy to feel any pain while he’s swishing down the side of a mountain.
Classify this one under aggregate demand part 2.
When you put the two together, these massive waves of public and private Dollars, you have an incredibly powerful macro-level trend driving demand for limited healthcare resources.
But investing in healthcare can be tricky. It’s not like picking Coke vs. Pepsi. It’s a highly fragmented and technical market. So in order to shed some light on the conversation, here are our top 3 picks in the category and how they tie into the two major themes.
Top 3 Healthcare Stocks
Amerisource is a straight play on drug consumption, one of the larger wholesalers in its category with a market cap of $10 billion. There are a few reasons why this looks like a good pick.
Number one, it operates in the middle of the distribution channel, which means it has more pricing power than the retailers while avoiding the market risk of increased generic or branded competition.
It’s also a beneficiary of increased access to medical resources, more specifically, pills. And anyone who’s ever been around pills or paid for a subscription knows this is big bucks. That’s the exact business AmerisourceBergen is in, they sell branded and generic drugs to drug stores like Caremark/CVS and Walgreens.
Although shares have been pretty strong on the chart, the valuation picture still looks solid at 15.5X forward, below its peer average of 16X. Analysts are looking for 14% growth next year.
This is a straight play on the expansion of Medicare and Medicaid, with both programs expected to move into an aggressive growth phase over the next two years as 11 million fresh bodies join the ranks.
Think about all those Federal Dollars flowing through these programs. That requires a system and a management process. That’s where Amerigroup comes into play, providing managed care services to Medicare and Medicaid companies and beneficiaries with a market cap of $2.7 billion.
But in spite of surging demand and a $40 billion pipe line of deals, shares are trading at only a fraction higher than their historical average. That means the market is discounting future growth, offering a unique touch of value to this growth stock.
Remember the knee we were talking about above? This is the company that makes ‘em. They also make the tools and medical devices required to perform these sophisticated operations, a nice one-two punch driving synergy between products and strategy.
This is a great way to invest in medical devices because Stryker lies somewhere between super-technical biotechs where it’s very hard to pick winners and losers and commoditized medical products companies that fight for the lowest price on things like stethoscopes and rubber gloves. The company relies on both unique and patented technology to develop its products, providing protection to the capital invested in research and development and from generic competition.
With a market cap of $25 billion, Stryker is definitely a bigger and well recognized name in the medical devices industry. As it stands, shares are priced at 17X forward earnings, a discount to the industry average and the lowest for this time of year in 10 years.
One for the Road
Our investments strategies are all about trends. Political trends, social trends and economic trends. Classify this one under social trends. With lower and middle class Americans struggling with high unemployment and limited resources, pawn and loan stores are becoming a popular destination for short-term financial needs.
Even though EZCORP is big in the world of pawning and lending, its market cap of $2.5 billion makes it a mid cap in the world of Wall Street. The company owns a little more than 1,000 pawn and lending stores in the United States, Canada and Mexico. With its business on the upswing over the last few years on general financial and economic volatility, EZCORP has plans to open 100 new stores in 2011.
The risk of owning a stock like this is in the regulatory environment. If the politicians decided they want to clean up the pawning and short-term lending industry, EZCORP takes a hit. But with sales and earnings growing every year through a tough recession and the long-term trend supporting demand, EZCORP looks like a good pick in the “specialized financial services” category.
Let’s take a quick look at a few of our stocks.
Good old Transocean was a bit rocky this week after the company reported Q4 results that fell short of analysts’ expectations. But by Friday, shares were back on the upswing; recovering from some short-term weakness to finish the week just about even.
Although it would have been nice to see RIG beat their number, it doesn’t have to grow sales and earnings 50% every quarter to keep people happy. This isn’t an Internet company. The Street likes RIG because of its assets and its status in a highly insulated market. So as those longer-term issued rose to the surface, so did shares.
We’ve been talking about Transocean a lot lately. This is the second time it’s fought back from losses after falling two weeks ago on some drilling M&A. But with energy prices sky rocketing this week, the market took notice that a company like Transocean is very well positioned to benefit from crude trading at $100 a barrel.
This was easily the most volatile stock of the week, with shares getting beat up pretty good mid week before a strong reversal erased most of the losses. As a fertilizer company, CF has a very strong correlation to grain prices. Some of the biggest grain importers in the world are Middle Eastern countries like Egypt and Libya. So when tension in Libya began to increase, the grain markets went limit down two days in a row as the market tried to figure out how that would affect imports.
It was a stark reminder that things that rip higher can also rip lower. And twice as fast. CF went from being our biggest winner to our biggest loser back to the middle of the pack within one week. The short-term volatility can be a bit scary, but the long-term trend in agriculture is well in play and this is a good way to benefit.
This is the kind of stock that makes you appreciate the energy trade. Cimarex has a very strong correlation to the price of crude, so with oil jumping $12 this week, we were bound to get a lift.
This is also a great example of why we have invested in a domestic E&P (explores and owns oil/gas assets in the United States-Texas/New Mexico/Kansas/Oklahoma). This company is protected from all the political and economic chaos of the international market. Pumping gas and oil out of the Permian Basin is a lot different than battling Nigerian Rebels hell bent on blowing up your pipelines.
But in spite of the gains, Cimarex still looks undervalued, trading at 17X forward, a nice discount to its peers 23X. That speaks of more upside.
CPL is showing us exactly what a good dividend stock can do when the market gets nervous. Shares rebounded nicely late in the week as new money found its way into more conservative segments of the market. With a massive yield of 7.4% and a stable business operating in a regulated industry, CPL attracted a lot of investor interest. That gave share a nice boost and pushed us into the green one of our more conservative positions.
Looking Forward
That’s it for this week. We’ll be back next week to look at some gold stocks and some new technology picks, bringing us another step closer to getting the portfolio fully deployed.
In the meantime, here are two articles to take a look at. The first is Warren Buffett’s view on the economy and the other discusses strategies to save money on taxes.
Buffett has Itchy Trigger Finger
Tax Deductions with the Biggest Payout
Your Investment Partner,
Mike
