Tag Archives: sector

4 Funds To Buy On Healthy Medical Sector Earnings

Ongoing worries, including weak global growth, strengthening dollar and the persistent slump in oil price, appear to have affected Q4 corporate earnings. Amid this dismal backdrop, the medical sector has emerged as one of the few bright spots. And the sector’s outlook for the coming quarters also looks impressive. As such, fundamentally strong funds from this sector may offer favorable investment propositions. Medical Sector Outperforms Total earnings of the 388 S&P 500 members that reported Q4 results as of Feb 17 declined 6.4% year over year on 4.6% lower revenues. And nine out of the 16 Zacks sectors are expected to suffer an earnings decline in their Q4 results. Total earnings for the S&P 500 members are expected to decline 6.7% year over year. In spite of the overall softness, companies from the medical sector that have reported as of Feb. 17 registered total earnings growth of 7.4% on 9.1% higher revenues. The sector is expected to witness earnings growth of 9.2% on 9.4% higher revenues for the quarter. Earnings and revenues for the sector are also expected to grow in 2016. For the ongoing quarter, the sector is predicted to register earnings and revenue growth of 3.8% and 8.4%, respectively. Some of the major players from this sector including Regeneron Pharmaceuticals (NASDAQ: REGN ), UnitedHealth Group Inc. (NYSE: UNH ) and Gilead Sciences, Inc. (NASDAQ: GILD ) posted impressive results for the fourth quarter. What Will Boost Medical Sector in 2016? The Affordable Care Act (ACA) is likely to play an important role in boosting the healthcare sector this year. With a gradual decline in the unemployment rate and healthy job additions over the past few months, new employees should widen the coverage of health insurance and perk up demand in the sector. Moreover, government spending on healthcare is also expected to rise nearly 4.9% this year. It is estimated that Medicare and Medicaid spending may increase to over $1.25 trillion in 2016. Further, merger and acquisition activities in the broader medical sector are expected to remain strong in 2016 and be significant catalysts to the sector’s growth. Separately, advancement in technology and innovation should also bode well for the space. Advances in genomics, biotechnology and artificial intelligence have not only helped the sector to grow over the past few years, but are also likely to be the growth drivers in the years to come. 4 Funds to Consider Given these encouraging earnings performance and promising outlook, we present four healthcare mutual funds that are significantly exposed to medical sector and carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the near 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 strong three- and five-year annualized returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and no sales load. T. Rowe Price Health Sciences (MUTF: PRHSX ) invests a major portion of its assets in common stocks of companies whose primary operations are related to health sciences. The fund focuses on investing in large- and mid-cap firms. PRHSX currently carries a Zacks Mutual Fund Rank #1 and has three- and five-year annualized returns of 20.6% and 21.2%, respectively. The annual expense ratio of 0.77% is lower than the category average of 1.36%. Fidelity Select Medical Equipment & Systems (MUTF: FSMEX ) seeks growth of capital. The fund invests the lion’s share of its assets in companies that are primarily involved in operations related to medical equipment and devices and the related technologies sector. The fund focuses on acquiring common stocks of both U.S. and non-U.S. companies. FSMEX currently carries a Zacks Mutual Fund Rank #1 and has three- and five-year annualized returns of 16.3% and 12.7%, respectively. The annual expense ratio of 0.77% is lower than the category average of 1.36%. Hartford Healthcare HLS IA (MUTF: HIAHX ) invests most of its assets in equities of healthcare-related companies of any size across the globe. The sub-adviser selects the equity securities and the issuers may be from other countries, including the U.S. cash balances of HIAHX are not expected to be more than 10% of its assets. HIAHX currently carries a Zacks Mutual Fund Rank #1 and has three- and five-year annualized returns of 18% and 17.4%, respectively. The annual expense ratio of 0.88% is lower than the category average of 1.36%. Fidelity Select Health Care Portfolio (MUTF: FSPHX ) seeks capital growth over the long run. The fund invests a major portion of its assets in companies involved in designing, manufacturing and selling healthcare products and services. The fund invests in companies across the world. FSPHX currently carries a Zacks Mutual Fund Rank #2 and has three- and five-year annualized returns of 21.2% and 18.2%, respectively. The annual expense ratio of 0.74% is lower than the category average of 1.36%.

XLU: This Sector Is Unhappy About Higher Rates

The Federal Reserve is expected to raise its benchmark lending rate in coming months. Utilities stocks have thus trended lower due to their bond-like qualities, and dependence on debt financing. As the Fed tightens its policy, XLU presents an attractive short opportunity. While the stock market as a whole may not correct due to the U.S. rate increase, Utilities Select Sector SPDR (NYSEARCA: XLU ) will likely show weakness. The utilities sector is heavily dependent on interest rates for two reasons. First, utilities use a lot of debt financing to run its operations. This means that when interest rates rise, their debt servicing costs increase, and thus weigh on bottom line growth. Another factor is that utilities companies are generally slow growing, and thus return earnings to shareholders in the form of a dividend to attract investment. This aspect gives utilities stocks, as well as the broader XLU a bond-like asset quality. Therefore, when interest rates rise, share prices of utilities stocks decline. The chart below shows the correlation between the U.S. 10-year Treasury yield compared to XLU over the last five years. As the Federal Reserve began slashing its lending rate as a result of the financial crisis, the 10-year yield fell from over 3.6%, to a bottom of 1.375%. This drastic decline was the catalyst for a sharp move higher in XLU, as well as broader U.S. equity markets. When the Fed made it evident in 2013 that it was planning on ending its stimulus measures, interest rates rose, while XLU consolidated tightly, but then utilities resumed their uptrend as an actual rate hike was found to be years away. Now, however, as markets prepare for an actual U.S. lending rate, XLU is experiencing volatility again, and has underperformed the broader market throughout 2015. With the Fed likely hiking rates over the next few months, utilities companies, such as– NextEra Energy (NYSE: NEE ), Duke Energy (NYSE: DUK ), Dominion Resources (NYSE: D ), Southern (NYSE: SO ), and American Electric Power (NYSE: AEP )-have all begun to trend lower. Their operating environment looks to become more challenging amid higher rates, while investors find the sector’s dividends less attractive relative to higher prevailing interest rates. For this reason, XLU and its component companies look to be interesting short opportunities in coming months as the Fed tightens policy measures. (click to enlarge)

Sector Rotation Watch: The FED Is ‘The New Anchor’

Summary The FED changed everything. The Sector Rotation Model since “crash Monday” had been indicating a turn to ‘risk on’ as bullish sectors began outperforming and bearish sectors lagged. Sector performance since the FED announcement has become decidedly bearish. The FED changed everything. Sector Rotation Background If you’re familiar with my discussions on “Sector Rotation”, you can skip to the next section ” Current Sector Performance” as the info here is simply a repeat for newcomers. Professional money managers rotate through the different market sectors depending on their beliefs about where we are in the economic cycle. These managers have a mandate to be fully invested, so when the economy – or market – turns down, professionals seek safety in “non-cyclical” stocks, or those where earnings are less likely to decline in a recession, and vice versa. The Sector Rotation model below explains it in a simple diagram. Chart 0 – Sector Rotation Model Individual investors have greater flexibility than professionals because they don’t have mandates to be fully invested, so they can exit the stock market rather than finding sectors “to hide in.” However, individuals are notoriously poor at making these decisions and have to deal with numerous behavioral biases, so a word to the wise: if you are older, nearing retirement, then caution and conservatism are warranted and your allocation to volatile equities should be decreased regardless of where we are in the investment and business cycle. If you are younger and can remain invested for the long-term, then you may want to remain fully invested, and possibly tilted toward “the right sectors” during weaker economic times. Current Sector Performance In my September 16, 2015 “Sector Rotation Watch”, while discussing the upcoming September FED announcement, I said “… but with the dissentions on the FOMC board, I’m not sure they are close to a decision.” By this I meant I did not think they could make a decision at all, implying they were “deer in headlights”. They froze, didn’t they? I also said “I’m not sure it even matters.” While I was right about the FED freezing, I might have been very wrong about the market not caring. In the comparison chart below, the left panel shows what the sectors were doing ahead of the FED announcement (since the “crash Monday”, 8/24) while the right panel shows sector performance after the FED. Chart 1 – Comparison of Sectors, pre- and post-FED (click to enlarge) Since “crash Monday” (8/24) on the left, the Sector Rotation Model would have you believe it was “full risk on”, with bull market “cyclical” sectors like Tech (NYSEARCA: XLK ) and Discretionary (NYSEARCA: XLY ) performing very well and “non-cyclicals” of Staples (NYSEARCA: XLP ), Healthcare (NYSEARCA: XLV ), and Finance (NYSEARCA: XLF ) lagging. Utilities (NYSEARCA: XLU ) aren’t just lagging, they seem to be showing a significant bullishness by lagging so far behind. Re-“anchoring” the comparison to the FED announcement and the Sector Rotation Model has reversed course; “places to hide” – aka non-cyclicals – have started performing better and “bull market” cyclicals have fallen off. The most notable performance is from the utilities sector, which is clearly in the lead, and even has a slightly positive return. This stands in sharp contrast to the pre-FED performance for utilities, although you should note they started performing better prior 5 days prior to the FED announcement (see the left panel). Not quite as important, but notable, is that consumer staples has pulled ahead of consumer discretionary, the long-time winner of this bull market. I would watch the discretionary sector very closely going forward, to see if it continues to weaken (bearish) or bounces back (bullish). There are two other things of note since the FED spoke, both being weak performances. The bull market mavens of Energy (NYSEARCA: XLE ) and Industrials (NYSEARCA: XLI ) had fallen hard in the past year, perhaps giving early warning caution signs, but since “crash Monday” they had been experiencing the “bounce back tendency” of laggards. Since FED day, these two sectors have tried to join their cohort of Basic Materials (NYSEARCA: XLB ) in a race to the bottom. Healthcare is almost winning that race, thanks to an idiot ex-hedgie CEO and the heavy media mania on his drug price increases, helping to create some “HillarySpeak”, or simply, a whole lot of bad press on drug stocks. We have gone from “risk on” to “risk off” very quickly, but more precisely, it was actually “risk-on, FED announcement, more risk-on, but just for 1 hour, then it turned sharply, intraday at 3pm, to risk-off”. This is essentially the title to an Instablog I posted on Sept 19. I’m trying to post “more timely” comments than publishing allows by using my Instablog, although it may be sporadic this next week due to outside time constraints. To get notices when I write an Instablog, you have to “follow me.” In chart 2 below, you can see the intraday reversal on FED day (a Thursday), which I highlight with the blue vertical line. I show it on three different symbols to show problems that occur when you look at index symbols. In the left panel, I show the S&P 500 index, and since not all 500 stocks open exactly at 9:30 – some are delayed – it appears the S&P opened at the prior days close. This issue occurs across all the sources I checked. The middle panel is the S&P e-mini but I can set TradeStation to only show the trading during the NYSE “normal” hours, and while the shape is right (Friday shows a gap down), the e-mini shows greater volume on Friday; this is due to the fact that it was a “triple witching day”. Thus I prefer the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) and any other “index ETFs” rather than the index themselves; the SPY shows volume on the FED day to be the greatest. Chart 2 – FED announcement (click to enlarge) A lot of people I respect keep telling me the economy is doing fine, recovering slowly but recovering nonetheless. They watch for “early warning signs” in the economy and the picture seems unclear (isn’t that what the FED just said through its “in-action”?). The market fell hard on China economic weakness, revealing its vulnerability, but rebounded; then the FED rained on the parade. It is obvious the market did not like the FED announcement as it has turned, sharply and decisively. There is one aspect to the Sector Rotation Model that is really interesting and might even give clues by itself. I noted how the utilities sector has gone from extreme lagging to extreme leading. Michael A Gayed , #3 on Seeking Alpha’s list of tops for Market Outlook, runs a “beta rotation strategy” at his firm and it is based simply on what the utilities sector is doing. They look at a rolling 4 week return for the XLU and if the utilities sector is outperforming the broader stock market, up more or down less, then the following month position yourself in utilities, and vice versa. In simpler terms, if over the last 4 weeks, professionals are “running for the exits”, out of the broader market and into the safety of utilities, then join them; and vice versa. Michael gave a very insightful presentation on December 28, 2014, to the Virginia Chapter of the CFA Institute, explaining this strategy. It is well worth the time to watch his presentation, but their study is a fast read. The model performance is significant, with it outperforming about 80% of the time and generating 4.2% outperformance annually. This 4.2% may not seem like much to an individual investor, who dreams of “double-baggers” and “triple-baggers” and such, but if stocks return 7% annually, in 20 years, your portfolio will be 3.9x larger; returning 11.2% annually, it’s 8.4x larger, more than twice as large. Like I say so often, you have to “do the math” and the math of compounding is significant. That is why everyone should start savings and investing as soon as they start working. I have to repeat one thing Michael said in the presentation and it is “the reason buy and hold does not work is that no one holds.” You need to have a plan and be careful about “running hot and cold” every time you read an article that runs counter to your thinking. Keep this in mind when you read the “spoiler alert” about his strategy that I simply must give you now. Michael says you might not want to buy utilities for the next month if they “show a pulse of strength” because 10% of the time, this type of move foretells a VIX spike. In other words, 10% of the time utilities “show a pulse of strength”, the market sells off hard. I wish Michael had defined this numerically because utilities are looking like they might be “showing a pulse of strength”, especially starting early last week (~9/22). Watching short-term news like the FED announcement can be important, especially when it might impact the long-term picture, but be careful about the short-term noise in the market. Fed speak is not noise, not always, such as Yellen mentioning “negative interest rates”. Negative interest rates is loosening, the exact opposite of the expected tightening rate hike some expected. The possibility of the FED pursuing negative interest rates is an important long-term dynamic. Understanding the long-term is critical no matter what your trading time frame; that is, if you trade on a 5 minute basis, you had better know what is happening on an hourly and daily basis, and while you would not trade on a 5 minute time frame based on what is happening on a yearly or decade basis, you still need to understand that higher time frame. If you have not read them yet, my first three articles are “primers for investing”, explaining the long-term nature of market moves. My sector rotation article discusses trying to “play rotating sectors” in a secular bear market (almost impossible) and it also discusses the extreme volatility you will experience, down and up, as discussed in greater depth in my article on long-term secular bear markets. Understanding these secular equity markets is dependent on understand long-term secular moves in interest rates . Given the background these prior articles provide, I’ll stick with the view from my prior Sector Watch article, even though the short-term call was “risk on” at that time and now it’s “risk off.” I repeat what I said then: “Whether we break to new highs, only time will tell, but given the higher risks associated with a longer-term view, and in light of my recent articles, I would still use any rally to raise cash, probably even if I was really young and investing for the long run.”