The broader equity markets have been under pressure for much of January, and while it may be tempting to consider completely exiting stock investing for a time, we’re staying the course with both of our actively-managed portfolios. We had been expecting a contraction in price-to-earnings (P/E) multiples across the broader market (see our outlook here), and the performance thus far in 2014 has not been surprising. In case you may have missed it, I sent out some very important thoughts over the weekend to keep in mind as uncertainty and volatility increase through the course of 2014:
Stay focused on @Valuentum portfolio holdings (best ideas), #asset allocation (cash) in portfolios and #prudence in allocating new capital.
— Brian Nelson, CFA (@ValuentumBrian) January 25, 2014
The goal of the Best Ideas portfolio centers on risk-adjusted outperformance, and the portfolio’s current 25% cash position will serve to aid such a measure in a down-market. This unique potential for outperformance in either up or down markets is achieved by methodological design, and a material pullback in the broader equity markets will allow the portfolio to put new capital to work. As for where this capital might go, we’ll be looking closely at either existing portfolio constituents or firms with high ratings on the Valuentum Buying Index, the stock-selection methodology (download it ).
Best Ideas portfolio has 25% #cash position in anticipation of ongoing P/E multiple contraction. Well-positioned. http://t.co/19HCBXDnvq
— Brian Nelson, CFA (@ValuentumBrian) January 24, 2014
As for our take on health care earnings during the fourth quarter, they’ve been mixed. Abbott’s (ABT) fourth quarter earnings were a little light on the top line, but we’re not worried too much about the industry stalwart, especially considering that the firm is targeting another year of double-digit earnings per share growth in 2014. Johnson & Johnson’s performance was solid (see here), and we had been expecting a strong top and bottom-line beat from St. Jude (STJ) thanks to peer Medtronic’s (MDT) fiscal second quarter results released mid/late November. Covidien’s (COV) fiscal first quarter results were also a pleasant surprise. On the other hand, Intuitive Surgical’s (ISRG) outlook is murky at best, but we think robotic surgery will be a long-term growth market. The company remains a very speculative idea. Perhaps the two biggest disappointments, however, have been Bristol-Myers (BMY) and Hill-Rom (HRC), the former on the basis of concerns about its cancer drug pipeline and the latter on a terrible quarterly miss and new restructuring efforts.
Valuentum’s Take
We haven’t seen anything in the fourth quarter that would send us rushing to the exit with the health care exposure in the actively-managed portfolios. We continue to like the Health Care Select SPDR ETF (XLV) in the portfolio of the Best Ideas Newsletter, augmented by small positions in Intuitive Surgical and Teva Pharma (TEVA). Johnson & Johnson and Medtronic are two ideas to consider for dividend growth, both positions of the Dividend Growth portfolio.
The article is tickerized for the following firms:
Biotechnology: ALXN, AMGN, BIIB, BMRN, CELG, GILD, QCOR, REGN, TECH
Drug Providers – Wholesale: ABC, CAH, MCK, SAB, OCR
Health Care Providers & Services: ALR, BRLI, CVD, DGX, IRWD, LH, PRXL
Health Care Services: DVA, HGR, HLS, MD, NDZ
Home Health Care: ADUS, AFAM, AMED, CHE, GTIV, LHCG
Hospitals: CYH, HMA, LPNT, THC, UHS
Managed Care: AET, CI, CNC, HNT, HUM, UNH, WCG, WLP
Medical Devices: AFFX, BIO, BRKR, CPHD, ISRG, LIFE, MDT, MSA, SIRO, STE, STJ, VAR, WAT, ZMH
Medical Equipment Providers – Wholesale: HSCI, MWIV, OMI, PDCO, STAA
Medical Information Service Providers: CERN, CPSI, MDAS, MDRX, MDSO, QSII