Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Healthcare, Industrials and Consumer Discretionary Investing Themes 2008: A Tale of Two Halves - Part 5

InvestorEducation / Sector Analysis Feb 09, 2008 - 02:57 AM GMT

By: Hans_Wagner

InvestorEducation Best Financial Markets Analysis ArticleThe beginning of a new year is a good time to make a new assessment of the important investment drivers and themes for the year. If you want to beat the market it is important to understand what is driving the markets and where the best sectors are to find good opportunities. By identifying these factors you will have a solid framework to assess the impact market movements and news events on your investment strategy. This is the fourth of a five part series on the outlook for the 2008 markets. The first part discussed the key drivers ending with a mention of what sectors will benefit and those that will be hurt. This Part discusses the Materials and Utilities sectors. Part 2 discussed Energy and Financials, Part 3 reviewed Technology and Consumer Staples. Part 4 presented the Materials and Utilities sectors. 


For those interested in making money in this market you might want to read Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) by Vitaliy Katsenelson. The core of Katsenelson's strategy is to break down into three key pieces what you need to look at when analyzing a company: Quality, Valuation, and Growth (QVG).

The chart below from StockCharts.com shows the performance for 2007 of the nine S&P 500 sectors. What is interesting is that seven of the sectors beat the S&P 500 for the year, with Financials and Consumer Discretionary being the laggards.

Healthcare Investing Themes

There are two important factors that drive the healthcare industry in 2008. The first is the perception that the aging baby boomers are requiring significantly more health related services and products. The other is the up coming Presidential election with healthcare being one of the major issues.

Healthcare has experienced difficult times and performed worse than many analysts have predicted. The basis for better performance in Healthcare is derived from the demand for more and better care from the aging population, especially what are know as the “baby boomers.” These are the people who were born soon after WWII and are now approaching retirement age. The oldest of these people will be 62 in 2008. This aging group of people represents about one third of the U.S. population. As a result many analysts expect them to spend more on drugs and health related services.

However, it will be several more years before we should see a dramatic jump in the demand for health related services from this group After all it will be 15 to 20 years before the leading edge of the boomers will reach the age where they will require extensive care. It is highly likely this group will live longer than their parents, which may cause them to consume higher expenditures of health services longer. However, we are not there in 2008. This is an issue that will become more important a number of years from now. So if you investing premise is based on the potential the baby boomers will generate in the healthcare sector, be prepared to wait for a number of years.

On the other hand the U.S. Presidential election is likely to make many investors avoid much of the healthcare sector. An all-inclusive health insurance program intended to cover the uninsured population is a primary focus. Such a program would likely include direct pricing negotiations between the federal government and drug manufacturers, adversely affecting the pharmaceutical firms. The winners would be the hospitals, because they have been negatively affected by rising levels of bad debt and the use of emergency rooms by uninsured individuals.

Another important election-year issue is generic biopharmaceuticals. The Democratic candidates have been vocal advocates for the removal of barriers blocking generic drugs and of creating a pathway toward biogeneric approvals at the Food & Drug Administration. However, there are numerous reasons why generic biopharmaceuticals are a distant threat to the U.S. biotech firms. First, these compounds are very difficult to manufacture. They are produced from human proteins, as opposed to raw chemical ingredients used to make traditional pharmaceuticals, so that plant validations alone would take years. Second, we don't think the FDA, as currently constructed, has the resources, not to mention risk tolerance, to take on a generic biopharmaceutical approval process. 

The generic drug manufactures are likely to benefit from the election as the government applies pressure to lower drug costs. Companies like Teva Pharmaceuticals (TEVA) and Barr Labatories (BRL) are likely to benefit.

The Health Care IT market may benefit from favorable political support with all candidates endorsing electronic medical records which require IT investment. As a result the large outsourcing firms such as Accenture (ACN) are likely to benefit. In addition electronic medical record companies such as Cerner ( CERN ), Quality Systems ( QSII ), and Allscripts ( MDRX ) should be of interest. 

And finally firms that can help lower the cost of drug development such as ICON Plc (ICLR) should benefit as the pharmaceuticals strive to lower their costs to develop drugs. As should firms that provide diagnostic testing, information and services.

Other than a few select firms, I do not expect the Healthcare to outperform the S&P 500 in 2008. 

Industrials Investing Themes

The industrial sector is comprised of companies that make and move products throughout the world. More than 40 percent of the revenues in this sector are from international operations, with many of the firms generating much more than that. Since various economists such as S&P Economics expect Asian and European economies to continue to do well, this bodes well for the sector overall. In addition an increasing share of revenues in this sector comes from higher-margin, aftermarket services which help to reduce cyclicality. The sector trades at a price earnings ration of 14.9 times projected 2009 earnings, vs. 13.9 for the overall market. Certainly earnings for these firms may decline which will raise the PE ratio, but the prospects look positive.

2008 election could be very significant for defense contractors, particularly if there are Democratic majorities in both houses of Congress and a Democratic President. If the prospect for this to take place looks more real, then it will tend to hurt the defense sector due to the projected reduction in defense spending. Possibly offsetting this situation would be demand for defense products from the rest of the world. 

Speaking of politics, it is likely that both parties will generally support spending on projects related to construction and engineering and industrial machinery, although the two parties might favor different types of projects in these areas. The Democrats are more likely to focus on environmental projects, including emissions control, water infrastructure, and alternative energy. A large potential positive impact from infrastructure upgrades for bridges, benefiting Lincoln Electric (LECO), Illinois Tool Works (ITW), and Kennametal (KMT); roads benefiting Astec Industries (ASTE), Terex (TEX), and Bucyrus International (BUCY); electric energy infrastructure likely aiding McDermott (MDT), Emerson Electric (EMR) and ABB (ABB)]; and greater efficiency in manufacturing benefiting ABB, Emerson, Rockwell Automation (ROK), and Roper Industries (ROP).

The high price of oil will drive investment in products and services to explore, produce and refine oil throughout the world. This will benefit companies that provide the support services such as Haliburton (HAL), Stumberger (SLB) and Baker Hughes (BHI). Many countries are designing and building plants and pipelines to move and process energy products. This will benefit the engineering companies such as Fluor Corporation (FLO) and Jacob Engineering (JEC) as well as the companies that provide key components such as pumps and valves like Flowserve Corporation (FLS).

Transporting goods and services such as grains, coal, manufactured products, exports and consumer goods continues to grow in demand throughout the United States. This benefits the rails such as Burlington Northern (BNI), or which Berkshire (Warren Buffett's company) owns 18%, Norfolk Southern (NSC), Union Pacific (UNP) and CSX Corp (CSX). 

The Industrials sector should outperform the S&P 500 in 2008 driven by the strength of the global economy and the eventual rebound of the U.S. 

Consumer Discretionary

Consumer Discretionary was the second worse performing sector of the S&P 500, beating only the meltdown by the Financials. Comprised of companies that depend on the consumers to spend their excess money, they took the brunt of the slow down in the U.S. economy during the later part of 2007. Since this slowdown is expected to continue for the first half of 2008, these companies will continue to encounter difficult times, especially as unemployment rises. Consumers are also controlling their spending due the problems in the credit markets and the negative wealth effect from declining home prices. On the other hand the strength of the global economies will be a positive for those companies that have substantial exposure to those countries such as McDonald's (MCD). 

Politics will have a positive impact on some parts of this sector. Regardless of which party gains the White House, advertisers will likely be the big winners, as spot TV advertising spending is projected to rise 9% to 10% in 2008, according to the Television Bureau of Advertising. This should benefit Disney (DIS), News Corp (NWS.A) and CBS Corp (CBS).

The economic stimulus package the federal government is planning is supposed to help stimulate the economy through a $146 to $157 billion bill that would give tax credits and rebates to 117 million people. This money is expected to add 0.2% to the GDP in the quarter it is distributed. Not exactly a big boost to the economy. Also, the retailers will receive the money, though many of the goods that may be bought are likely to be made in other countries, meaning a certain portion of the stimulus package will go help stimulate the global economy. Such is the nature of our interconnected economies. Unfortunately it just increases our debt with very little benefit. But enough of my opinions.

This sector is likely to continue to under perform the S&P 500 until investors believe the U.S. economy is at or near a bottom. Then it will be a good sector to invest. The important indicators to watch will be consumer sentiment. When sentiment finds a base and/or begins to rise then it will be a good time to seek out companies in the Consumer discretionary sector.

I expect the consumer Discretionary sector to under perform the S&P 500 in the first half of 2008 and then out perform during the second half. 

The Bottom Line

Healthcare face a difficult year ahead as they respond to the changing healthcare system in the United States. As a result they will under perform the S&P 500 for the foreseeable future.

Industrials will beat the S&P 500 throughout 2008, especially the companies that have significant global exposure. 

The Consumer Discretionary sector will experience a difficult first half of 2008 and then return to its upward path as the prospects for the U.S. economy improve. Companies that have exposure to global economies or political advertising should hold up better than others..

Readers interested in learning more about Sector investing should read Sector Investing, 1996 , by Sam Stovell. It discusses how to use sector rotation in your investing endeavors. An expensive book, but worthwhile for those interested in using sector rotation strategies to improve the performance of their portfolios.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Hans Wagner Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in