Operating in a sector unaffected by the global economic slowdown, these three safe stocks are the best buys out of the small group of stocks able to grow. As the profit recession carries on, investors should overweight the stocks that can still grow earnings and revenues.
In my last column we covered what a bifurcated market it has become as far as earnings growth goes. To recap, only three of the ten industry sectors within the S&P 500 are expected to see any earnings growth this quarter. They are Telecom, Consumer Discretionary and of course, Healthcare; my current favorite sector in the market right now.
We noted how equities are in the middle of a fairly long “profit recession” with earnings within the S&P 500 set to post their fourth straight quarterly decline after first quarter earnings reports are all tallied up and accounted for. According to the current consensus, the second quarter of the year will run that streak to five in a row before “hopefully” we start to see some meager earnings growth return in the second half of 2016.
The anemic global backdrop is an incredibly challenging environment to overcome right now with worldwide demand at levels not seen since 2009 when the global economy was just emerging from the “Great Recession”. Technology is particularly ugly right now as we noted in our last column with Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) declining significantly after posting results and offering guidance that disappointed investors. IBM Corporation (NYSE: IBM) posted its umpteenth quarter of declining revenues as well and also sold off.
It did not get any better later in the week when Twitter (Nasdaq: TWTR) slid below $15 a share after earnings as the one-time social media darling continues its slide into irrelevance. Not even mighty Apple (Nasdaq: AAPL) can withstand this dismal global current right now. The giant from Cupertino reported its first year-over-year quarterly revenue decline in 13 years this week. Even with tempered expectations, the stock sold off as the company’s decline in sales were worse than feared.
Not only did Apple’s market share slip significantly, but the first quarter will mark the first time ever that global smartphone demand had slipped since Apple introduced the world to the iPhone back in 2007. Even Carl Icahn who made a mint on Apple by accumulating a huge stake in the shares a few years back announced that he is out of his position.
One sector that seems to have momentum and value right now is Healthcare. Thursday was a microcosm of the positives in the sector starting with increasing M&A activity. Before the bell even rang on Thursday, Abbott (NYSE: ABT) had announced a $25 billion purchase of medical device maker St. Jude Medical (NYSE: STJ). In addition, AbbVie (NYSE: ABBV) stated it has acquired privately held South San Francisco-based Stemcentrx for ~$5.8 billion in cash and stock before announcing it had beat quarterly earnings by a couple of pennies a share. OncoMed Pharmaceuticals, Inc. (Nasdaq: OMED) which has a similar focus to Stemcentrx and that I have a small stake in rose more than 15% on speculation it is now a target for acquisition based on the purchase of its brethren.
Finally, mid-cap Medivation (Nasdaq: MDVN) which has nearly doubled in the last three months shot up again as rumors flew around a possible bidding war among industry heavyweights was erupting to acquire this oncology business with a more than promising pipeline.
We are also starting to get an earnings parade from the big pharma and biotech names. Despite a big down day for the overall market Thursday, both Celgene (Nasdaq: CELG) and Bristol-Myers Squibb (NYSE: BMY) posted encouraging results that caused their stocks to buck the overall downward trend of the market in Thursday’s trading. Amgen (Nasdaq: AMGN) also reported better than expected earnings after the bell on Thursday.
I believe the pharma and biotech sectors will continue to outperform the market as they have done throughout the second quarter of the year so far. They are coming off long and deep bear markets and their collective valuations are close to the lowest point compared to the overall market since 2011 even with their recent rallies.
In addition to being two of the few sectors that can deliver both earnings and revenue growth in a challenging economic environment, it also appears that the “animal spirits” in the M&A market have been perking up since the Treasury Department kyboshed the $150 billion merger between Pfizer (NYSE: PFE) and Allergan (NYSE: AGN) several weeks ago.
It seems the drug giants are now concentrating on the mid and small caps in these industries to make acquisitions since the government seems intent to prevent any “whales” from tying up. It is important to remember than M&A volume set a record by dollar transactions in 2014 and was on its way to doing the same in 2015 before the bear market swept over the pharma and biotech sectors starting last summer. Watching the recent pick-up in M&A activity, it feels like a beginning of a possible “feeding frenzy” as drug giants make moves to replenish their pipelines because of the fear of getting left out of the best assets as their competitors make their moves.
Combined with the other factors listed above, this is why Healthcare is my only overweight position within my portfolio at the moment even I as I continue to up the allocation to cash as given the profit recession the market is currently in.
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