Healthcare Positioning in a Bull Market

Week in Review

The markets had an impressive week overall, closing with a whimper on Friday. The S&P 500 and Nasdaq Composite both saw six-day winning streaks snapped, though they maintained impressive weekly streaks, with the S&P 500 up 2.6% for its fifth consecutive weekly gain and the Nasdaq up for eight straight weeks.

Last week, the Federal Reserve decided to keep its rates unchanged in a much-anticipated decision. Although this decision was expected by many, what was not expected by investors was the drop in year-ahead inflation expectations among consumers. Consumer inflation expectations dropped to 3.3%, the lowest level since March 2021.

Lower inflation expectations can have a real impact on actual inflation, and this is likely to be welcome news for the Federal Reserve. Investors have already begun to look ahead to the FOMC's meeting in July.

Friday’s consumer sentiment data came as an additional boost to the market's enthusiasm. The University of Michigan's consumer sentiment index saw 8% growth to 63.9, its highest level in four months and above the economist's expected reading of 60.

Consumers are continuing to spend despite expectations that spending would decline in May. last week we saw retail sales rise 0.3% from the previous month, beating expectations for a 0.2% drop. These figures mark the second consecutive month of sales increases.

The biggest increases were in building material and garden stores, motor vehicle and parts dealers, and furniture and electronics stores. The only categories to see a decrease were gas stations and miscellaneous store retailers, which can be attributed to the gradual decrease in gas prices.

These results show that consumer spending is still strong despite some evidence of slowing foot traffic and bank credit-card data. It looks like people are still willing to open their wallets and make purchases. Will that shift with student loan payments kicking back in? And more importantly where will we see the impact?

Overall retail spending, including restaurants, rose 1.6% in May from a year earlier, a slower gain than price increases. But when excluding gasoline stations, spending gains matched closely with inflation

Earnings & Economic Calendar

It's a short trading week ahead with plenty of reports and economic data to dig into. On Monday, we commemorate Juneteenth National Independence Day and the U.S. stock and bond markets are closed in observance.

On Tuesday, FedEx reports earnings and then on Thursday, Darden Restaurants, FactSet, and Accenture will follow. CarMax rounds out the week on Friday. The housing market is a hot topic, and we have plenty of data to pour over.

On Monday, the National Association of Home Builders releases their housing market index for June. Tuesday brings the Census Bureau's residential construction data, then Thursday we get the existing-home sales from the National Association of Realtors.

Finally, the Conference Board releases their leading economic index for May on Thursday too.

We'll also have two days of Federal Reserve Chairman Jerome Powell's testimony before Congress. All in all, it's a full week and we're looking forward to digesting all the news ahead.

Thoughts On Healthcare Sector Positioning

1. Rebalance existing holdings: Rebalance existing holdings to bring them up to the desired target. Consider rotating out of winners and into other names with better growth prospects.

Recently with the weakness in the stock of CVS we may be looking to bring the name back to our 2.5% target. We also have been looking to exit United Healthcare (UNH) in favor of names with a better growth profile. We are also concerned that insurance companies will once again be a political punching bag in the 2024 election season.

2. Identify potential new investments: Analyze the Healthcare sector for leaders and laggards, looking for areas that may have been overlooked or have recently emerged. Consider stocks of companies with strong fundamentals, including a history of earnings and revenue growth, a solid balance sheet, and a competitive advantage.

One name we have been evaluating for clients is Idexx Labs. We find the earnings quality and market reaction of IDXX compelling. They engage in the development, manufacture, and distribution of products and services for the animal veterinary, livestock and poultry, dairy, and water testing markets. Net Income has grown by almost 17% annually over the last 3 years.

3. Evaluate new investments: Research potential new investments to make sure they align with your overall goals and risk tolerance. Consider the company’s management team and their track record. As part of due diligence, make sure the company’s business model is sound and that it is well positioned in its industry.

Another replacement for UNH we have evaluated for clients is Intuitive Surgical. ISRG engages in the provision of robotic-assisted surgical solutions and invasive care through a comprehensive ecosystem of products and services. Its products include Da Vinci Surgical and Ion Endoluminal systems. Similar to Idexx Labs, we find the earnings quality and market reaction of Intuitive Surgical attractive. Revenue has also grown by over 11% a year over the last 3 years.

4. Allocate new investments: Once you have identified several companies to consider, begin allocating funds to them. Make sure to diversify across different sectors and markets and don’t concentrate too much of your money in any one area.

The swap for United Healthcare for Intuitive Surgical and Idexx Labs is an explicit effort to swap a dividend paying stock, also known as a value stock, for growth stocks. We believe in this phase of the market, growth stocks could fare better.

5. Monitor performance: Track the performance of existing and new investments to ensure that they are meeting your expectations. Rebalance as necessary to maintain your desired weightings. Regularly review the portfolio to identify any changes that should be made to the allocations.

Our updated allocations to healthcare stocks is below with the far-right column containing the weight within our equity portfolio:

Chart of the Week: Last week we entered a technical bull market

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.