 |
Summer traditionally was a period when investors could take some time to mull over emergent themes coming into play for the back half of the year, and that’s why we have the adage “sell in May and go away.” Modern day communications, though, mean that an annual summer retreat to the Hamptons doesn’t really get an investor away.
And as we sidle up to the unofficial start of summer in the U.S. — this weekend’s Memorial Day holiday — I see opportunity in sticking around and looking into ignored corners, where sentiment may have pushed fundamentally superior stocks beneath their intrinsic values.
There’s always a “story” behind this kind of opportunity. Back in 2011, there was a similar set-up in financial sector stocks, when a change in the U.S. credit rating, driven by political sclerosis, ended up providing a great opportunity to enter the sector as an investor. This year, we’re in the run-up to a similar situation — the fall elections and their themes — only the potential effects are not as clear as they were back then.
A lot of attention is likely to be paid to the pros and cons of the Affordable Care Act (ACA — aka Obamacare) this campaign season. Even though the ACA is now law, there is a groundswell that opposes it and would like to curtail or repeal it wholesale. Although I do not expect that extreme an outcome out of this political season (i.e. I expect the ACA to live on pretty much intact post-elections), I do expect significant investor apprehension to surface in this sector over the summer, and for that apprehension to create buying opportunities.
 |
| Pullbacks in healthcare stocks this summer could present good entry points for savvy investors. |
The first group of healthcare stocks that comes to mind when I think of those which could suffer due to fear driven by political rhetoric? The insurers. But we have several — including insurers Aetna (AET — Rated A+), UnitedHealth (UNH — Rated A-), and Wellpoint (WLP — Rated A-), as well as acute-care facilities operator Universal Health Services — ranked in the highest reach of Weiss Ratings measurement, even in a sector that as a whole does not shine among peers in the grand scheme of the Weiss Ratings set.
It’s true that the Weiss Ratings are typically averse to companies in riskier industries (riskier in terms of earnings growth and balance sheet growth stability), such as the biotech area — where expected profits could be long in coming and are dependent on science that eludes math geeks like most of us investors.
That said, established drug makers like Pfizer (PFE — Rated A) and Johnson & Johnson (JNJ — Rated A) are a good place to look for entry points right now. PFE is fresh off of a rebuff from its recent attempt to buy rival AstraZeneca (AZN — Rated C), which probably means that a serious investor should curb his/her enthusiasm for any puffed-up future bid, from a fundamental standpoint.
[Editor’s note: Don has used the Weiss Ratings as one of his tools to help make Martin $311,671.64 richer! And he reveals how you can follow his every move right here.]
I expect some more of this large-scale consolidation in the near future for major drug companies, though. My inclination would be more toward purchasing established biotech firms, if I were a Big Pharma exec. And some of the higher-rated names I’m looking at as an investor right now in the biotech sphere are A-Rated names like PDL Inc. (PDLI), Biogen (BIIB), and Amgen (AMGN). I am not looking at names in the more long shot area (biotechs where the future commercialization of some above-my-head science) is the key to fundamental success.
No, I’m more interested in the summertime volume lull, which could potentially give us noise-based entry points, which are by definition temporary. I’m looking for fear-induced pullbacks in major health insurers (like those listed above) and Big Pharma fallen angels (again, like those above), and up-and-comers in biotech which are like those above.
I am also always on the hunt for smaller or more dynamic firms in this sector. I think that finding a stock Rated B- or below, but which is on the move to break into the Buy (B- or above) category in the Weiss Ratings set, can be the performance-enhancing opportunity I’m really looking for to outperform the indices.
Best,
Don Lucek
