Tag Archives: outlook

3 Healthcare Funds To Buy On Biotech Rebound

After being beaten down during the first three months of the year, biotech stocks made a remarkable rebound over the past few days. Though the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) is still down 17% in the year-to-date frame, it posted an increase of 5.9% on Wednesday, witnessing the best percentage gain since March 12, 2009. In fact, the 7.9% rise in IBB over the past one-month period also propelled healthcare mutual funds, which gained 2.9% during the same period. Mutual funds from this category may be profitable for investors, who are looking to gain from this encouraging trend. Reasons for the Recent Surge Strong gains of 5% and 3.5% respectively in Pfizer Inc. (NYSE: PFE ) and Allergan plc (NYSE: AGN ) played an important role in lifting biotech stocks on Wednesday. The increase was prompted when the companies mutually called off their merger after tougher tax inversion rules were imposed by the U.S. Treasury Department and Internal Revenue Service. Leaving the deal behind, Allergan CEO Brent Saunders said that the company, “could act immediately if” it gets “the right opportunity with the right growth profile and the right strategic logic.” Meanwhile, it is now speculated that names of other UK-based firms like GlaxoSmithKline plc (NYSE: GSK ) are on Pfizer’s radar. Moreover, a surge of nearly 17% in shares of Edwards Lifesciences Corp. (NYSE: EW ) gave a boost to this sector. According to the company, data from the trial revealed that a procedure which uses its SAPIEN 3 valve shows better results than open heart procedures for certain patients. What’s Ahead? In spite of the recent surge, some of the concerns that affected the performance of biotech stocks at the start of 2016 may continue to impact the sector in the near future. Calls for reducing the prices of several drugs had played an important role in dragging down the sector. Hillary Clinton’s comments on the prohibitive pricing of certain medications drew much attention last year, weighing down on the sector’s stocks. Moreover, the U.S. Treasury Department’s adaptation of new rules to contain inversion-related deals may lower the volume of overseas merger and acquisition deals in the near term. Moreover, mixed earnings results during the fourth quarter affected the sector to quite an extent. Also, continued decline in the first-quarter earnings forecast is likely to hurt the sector’s performance in the days ahead. First-quarter earnings from the healthcare sector are anticipated to grow only 0.6% from the year-ago level compared with 9.3% growth witnessed in the previous quarter. Moreover, the year-on-year revenue growth rate is projected to decline to 8.8%, lower than the fourth quarter’s growth pace of 9.7%. However, an innovative product pipeline, product approvals and impressive performances by key products may act as growth catalysts and help the sector to overcome the above-mentioned concerns. Moreover, favorable valuation can make smaller companies within the sector attractive bets for acquisition. Separately, positive results from clinical trials also lift the sector’s stocks. They are difficult to predict, but come as welcome surprises for investors. 3 Healthcare Funds Picks Given this strong recovery, we have highlighted three healthcare mutual funds that either have a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. These funds have encouraging one-month and three-year annualized returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and no sales load. Delaware Healthcare Fund I (MUTF: DLHIX ) invests a large chunk of its assets in equity securities of companies that are engaged in operations such as production, development and of products and services related to healthcare sector. DLHIX is a non-diversified fund. Along with a Zacks Mutual Fund Rank #1, DLHIX has one-month and three-year annualized returns of 5.9% and 16.8%, respectively. Annual expense ratio of 1.11% is lower than the category average of 1.35%. Fidelity Select Biotechnology Portfolio (MUTF: FBIOX ) seeks growth of capital. FBIOX invests the lion’s share of its assets in companies primarily involved in the research, development, manufacture, and distribution of various biotechnological products. The fund invests in securities of companies throughout the globe. Along with a Zacks Mutual Fund Rank #2, FBIOX has one-month and three-year annualized returns of 5.1% and 16.8%, respectively. Annual expense ratio of 0.72% is lower than the category average of 1.35%. Live Oak Health Sciences Fund (MUTF: LOGSX ) invests the majority of its assets in common stocks of healthcare companies or those related to medicine and life sciences. Though LOGSX primarily focuses on acquiring domestic securities, it may allocate a small portion of its assets in securities of foreign firms and ADRs. Along with a Zacks Mutual Fund Rank #2, LOGSX has one-month and three-year annualized returns of 3.9% and 15.9%, respectively. Annual expense ratio of 1.08% is lower than the category average of 1.35%. Link to the original post on Zacks.com

The Buyback Binge: Is It Good For Shareowners?

By Paul McCaffrey Share buybacks haven’t been getting the best press of late. They’ve been dismissed as ” self-cannibalization ,” “corporate cocaine,” a recipe for conflict of interest, and a form of stock price manipulation – not to mention shortsighted and counterproductive . Yet share buybacks are incredibly popular. Since 2009, S&P 500 companies have spent more than $2 trillion on repurchases. From 2005 through late 2015, IBM (NYSE: IBM ) spent $125 billion on them. In the first three quarters of 2015 alone, Apple (NASDAQ: AAPL ) bought back $30.2 billion worth. Indeed, much of the credit for the post-financial crisis bull market of the last seven years can be attributed to the ubiquity of share buybacks. At bottom, repurchases are a way of rewarding shareowners. By buying up shares, a company raises the value of those remaining with its stockholders, which in turn will tend to boost earnings per share (EPS). At the same time, buybacks are more tax efficient for shareowners, than, say, spending the capital on taxable dividends. Share buybacks, proponents maintain, are also a good use of excess cash when business circumstances make the timing for other outlays, whether acquisitions, new research, expansion, etc., less than ideal. Critics argue that whatever the upsides of buybacks, they tend to be short-lived, adding no real value over the long term. Every dollar spent on buybacks is one less that could otherwise be used on research and development, acquisitions, etc. Management surely could find a more productive use of capital. And sometimes the repurchases are financed by issuing debt. The timing can also be problematic. Repurchases may make sense if a stock is undervalued, but if a stock is priced higher than its intrinsic worth, any buyback is a net loss. Buybacks can create a degree of moral hazard for management as well, skeptics claim. Pay packages are often tied to EPS, so executives may be incentivized to implement buybacks and sacrifice the firm’s future viability for a short-term boost in EPS. Similarly, if compensation is in any way a function of share price, executives might be inclined to use share repurchases to meet their targets. Buybacks can likewise be employed to facilitate share options programs for management, effectively transferring value from shareowner to executives. To get a sense of how investment professionals view share buybacks, we polled readers of CFA Institute Financial NewsBrief . Specifically, we asked them whether share buybacks were good for shareowners. Are share buybacks a net positive or negative for shareowners? A majority (53%) of the 814 respondents said that, on the whole, share buybacks constituted a net benefit to shareowners. Another 24% declared that they were neither positive nor negative, while 21% felt they were detrimental. Of course, the poll question and the results have a number of enigmas embedded in them. The degree of variation encapsulated in the word “shareowner” necessarily complicates the matter. Each shareowner is unique, with different inclinations and incentives. Certainly, share buybacks might benefit the shareowners anxious to unload their stakes. But those with a longer time horizon might have a vastly different take on things. It also brings up the whole concept of shareholder value, and by extension, shareholder value maximization and whether that it or isn’t a dumb idea . And what about the larger implications of share buybacks? Ultimately, the poll focuses on only one kind of stakeholder. Whether repurchases are beneficial to a company’s long-term health, its employees, the markets, and the larger economy are entirely different issues, and well worth further exploration. Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

3 Charts: What Debt, ‘CapEx,’ And Whole Profits Tell Stock Investors

For several years now, I have expressed concern about the accumulation of debt by governments, corporations and households. Some folks seem to recognize that – across the board – total debt levels are on an unsustainable path. Others have argued that the only thing of importance is the ability to service existing obligations, and that each group is quite capable of paying back the interest on their loans. Unfortunately, the naysayers argument ignores several unpleasant realities. First, borrowers at all levels – family, company, government – continue to increase their total debt as well as increase their interest expense. Borrowing costs would have to drop further to maintain a favorable picture for debt servicing. Secondly, it is unlikely that borrowers at all levels will have permanent access to lower and lower rates. “Subprime” was not merely a 2008 struggle, nor was the euro-zone sovereign debt crisis isolated to 2011. Both the domestic credit catastrophe as well as the European version involved an inability to pay when bond prices fell as corresponding yields climbed. Not surprisingly, corporations will be heavily pressured in 2016. Many will see more and more of their cash flow being diverted to the repayment of obligations. Some will fend off default concerns, while others will succumb. Back in mid-October, Bloomberg presented an article on the epic debt binge of “Corporate America.” The author chronicled the alarming deterioration of American balance sheets, from total debt excesses resulting in the highest interest expense ever to the lowest capacity to service obligations (i.e., a.k.a. interest coverage) since 2009. More recently, Deutsche Bank’s Chief U.S. Economist described corporate balance sheets as being worse off than household balance sheets. Corporate debt as a percentage of national income has been pushing levels that remind us of the past three recessions. Click to enlarge If companies have been borrowing like intoxicated Air Force pilots, did those companies at least spend the money in beneficial ways? That depends. Most executives chose to borrow dollars to acquire stock shares of their own corporations – an activity that reduces total shares in existence while simultaneously making those shares more scarce for would-be investors. Stock buybacks also improve investor perceptions of profitability since earnings are measured against an ever-decreasing number of stock shares; that is, “goosing” earnings per share ((NYSEARCA: EPS )) is a popular sport for executives who have been tethered to near-term results. However, spending borrowed dollars on physical assets (e.g., property, industrial buildings or equipment) as well as new projects is often beneficial to the long-term well-being of a corporation. Not doing so when the funds are available becomes even more problematic when there are less dollars to spend in a decelerating economy. Consider the above-mentioned capital expenditures, or “CapEx,” in previous business cycles. In the 1992-2000 expansion and the 2003-2007 expansion, executives spent handsomely on property and projects; companies reduced capital expenditures dramatically when the dollars got tight in the 2001 contraction as well as the Great Recession (2008-2009). Click to enlarge Now shift your attention to the last few years from early 2014 to early 2016. Relative to prior economic recoveries, CapEx has been negligible. The implication? Companies that invest for the future have greater confidence in their business models, more so than those that primarily aim to beat quarterly expectations through financial slight of hand. Yet companies have not really been investing for the future in a meaningful way. Ironically, accounting gamesmanship notwithstanding, earnings-per share ( EPS ) at S&P 500 corporations has been waning since September of 2014. Sales have been falling for just as long. This brings me to a third chart. The Bureau of Economic Analysis (B.E.A) has a preferred measure of profitability known as “whole economy profits.” In brief, it assesses profits that are derived from current production by removing inventory issues. Purportedly, this provides a strong indication of vulnerability to shocks as well as outright economic contraction. Click to enlarge The last two times that the six-month moving average (two quarters) for whole economy profits dipped below 10%, the U.S. economy fell into recession. Moreover, the last two times this occurred – in the beginning of 2000 and mid-way through 2007 – severe stock bear markets followed. Let’s review. Interest expense, interest coverage and total debt levels are all on the rise. That may make it more difficult to expand operations for the longer-term future via capital expenditures. Lower CapEx may even imply that non-GAAP profits, GAAP profits and whole economy profits will continue to struggle, leaving less cash flow for additional buybacks or business investment. Moreover, when you place these trends in the context of far-reaching slowdowns around the globe, one may find little longer-term investment reward for piling into the S PDR S&P 500 Trust ETF (NYSEARCA: SPY ) at a trailing 12-month GAAP P/E of 23.5 . For moderate growth and income clients, my allocation recommendation since June/July of 2015 remains defensive. For the most part, we have 45%-50% in large-cap only stock assets. Our largest ETF holdings are still tilted toward “safer equity” via funds like the iShares USA Minimum Volatility ETF (NYSEARCA: USMV ), the iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) and the SPDR Dividend ETF (NYSEARCA: SDY ). Our income ETF holdings with a weighting of 25% are still tilted toward “investment grade” via funds like the SPDR Nuveen Barclays Municipal Bond ETF (NYSEARCA: TFI ), the i Shares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) and the Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ). Our 25%-30% cash equivalent allocation is still acting as a buffer against volatility, while remaining available to buy risk assets at significantly more attractive valuations. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. 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