Tag Archives: hillary-clinton

Risk Adjusted Sector ETF Performance: 3rd Quarter Update

Analysts often compare sectors for clues about the economy’s performance and future investments. The performance of these sectors must be adjusted for beta, or risk. What does this 2rd quarter adjusted performance tell us? Seeking Alpha readers know that I periodically analyze the performance of the nine S&P 500 sector ETFs to obtain clues about where the economy is going. Last years’ underperformance by the Materials Select Sector SPDR ETF (NYSEARCA: XLB ) was only the beginning of a very bad year (so far!) for those stocks. In contrast, after adjusting for risk, Consumer Discretionary (NYSEARCA: XLY ) stocks performed well late last year: and that outperformance has continued. (You can see the article on which this analysis is based here .) The most recent quarter was unpleasant for common stocks: so while all nine sectors fell, we must adjust this poor performance for the varying risk profiles of each sector before we compare it to the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). An illustration of how this is done will help, and point out a major red flag for the market going forward. Investors know that the healthcare sector has been one of the leaders in this bull market since it began in 2009. In the last three months the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ) fell 12%, two and a half percentage points more than the 9.5% for SPY. So yes, the market has lost some of its leadership: always a source of worry for bulls. But after adjusting for risk, the situation is even worse than it looks! According to yahoo finance XLV has a beta of .59; in a down market we should expect it to fall less than the broad indices. Not more! Specifically we should expect it to fall only 5.6%: (S&P 500 change) x (Sector ETF beta) = (expected risk adjusted ETF return) so (-9.5%) x (.59) = (-5.6%) So the healthcare sector underperformed, not by 2.5%, but by 5.6%! The full results are shown below. You can see that along with healthcare, energy (NYSEARCA: XLE ) and basic materials performed much worse than the market in the last few months. Risk Adjusted ETF Performance 3rd Quarter 2015 Select Sector SPDR ETF beta Actual Return Expected Return +/- Discretionary .91 -3.0 -8.7 +5.7 Technology (NYSEARCA: XLK ) 1.35 -9.1 -12.8 +3.7 Industrials (NYSEARCA: XLI ) 1.00 -11.0 -9.5 -1.5 Basic Materials 1.13 -21.0 -10.7 -10.3 Energy 1.02 -22.0 -9.7 -12.3 Staples (NYSEARCA: XLP ) .49 -3.5 -4.7 +1.2 Health Care .59 -12.0 -5.6 -6.4 Utilities (NYSEARCA: XLU ) .44 -3.0 -4.2 +1.2 Finance (NYSEARCA: XLF ) 1.19 -8.0 -11.3 +3.3 S&P 500 Index 1.00 -9.5 -9.5 zero All three underperformers can turn to special situations as an explanation: Healthcare? Hillary Clinton’s drug company bashing . Energy? The continued weakness in oil and natural gas prices. Basic materials? Continued weakness in Asia , especially China. Even given the dour economic news in these sectors, investors should remember their underperformance signals that this bad news has signaled the market has still not completely discounted this poor outlook. Focusing on healthcare in particular, the failure of this sector’s leadership has ominous signals for the market going forward. While some market indexes have signaled a bear market is now in progress–an issue I shall address in an article tomorrow– I am willing to give the market a bit of slack here. Why? Notice the strength in consumer discretionary stocks. This suggests families are benefiting from lower energy prices: a case of one good cancels out the bad, perhaps? The strength in tech is encouraging. Surprisingly the best indication might be the belated showing of the financial stocks. Remember: this whole debacle began years ago in the financial sector! For them to perform well in a weak market which still may face an interest rate increase from the FED , is encouraging. Keep your long and short powder dry until the market gives us clearer signals. More on this in my next article.

The Health Care Sector’s Weakness Could Be The Investor’s Best Friend

Summary The health care sector went through a significant meltdown during the recent weeks. A long term investor might consider it as an opportunity to invest in great companies. Here is a list of 4 non-expensive ETFs that are focused on the Health Care sector. Three weeks ago a good friend of mine bought shares of Mylan Inc (NASDAQ: MYL ). His goal was to invest in a defensive stock in order to mitigate the volatile market. Since the day he made the purchase the stock was hammered down and closed is currently at a total of ~20% lower. Mylan is a global generic and specialty pharmaceuticals company that is registered in the Netherlands. In 2007, following a big acquisition Mylan became the second-largest generic and pharmaceuticals’ company in the United States. It was a wise decision at the time. Here is Mylan’s forecast P/E growth rates in the coming years based on Nasdaq.com. A P/E of 8x for a double digit growth company is not too bad at all. MYL’s stock price free fall was no different compared to other Health care companies’ stocks. If looking at the behavior of the S&P 500 Health Care Sector the graph tells us that there was about 20% drop in the sector since the recent highs. On Wednesday, September 30th, there seemed to be some recovery after several bloody weeks. (click to enlarge) The drop is explained by Hillary Clinton’s ” price gouging ” tweet which led to concerns within the investors’ community regarding higher regulations on drug pricing. Is this massive drop justified or is it an out-of-panic oversell and therefore a great opportunity? Why do I think it is an oversell? Several reasons lead me to believe it is an extreme reaction over nothing and it is a temporary meltdown: The market is very volatile in the recent weeks and it seems that the focus is only on the bad news that are being a catalyst towards a dipper correction. Back in August it was the less-than-expected growth in China’s economy, than it was the Volkswagen ( OTCQX:VLKAY ) scandal and now it is this tweet. Any regulation would need to pass Congress where the Republicans still have the major votes. It would be at least couple of years until something would really change. Not all companies are taking outrages profits on their developed drugs. The amount of Research and Development the companies are investing is huge and therefore the economy of the business will eventually dictate the prices. It will not be the politicians. The sector is composed from different types of companies. Some develop an original medicine or drug and there are generic drug companies. Some are focused on specific niches and others have huge diversification. Even if there will be new regulations not all will suffer equally. Some would even benefit from it. For those, like me, who think that it is the later here are some ETFs that invest in this sector and should be profoundly examined by the long term investor. Why an ETF and not specific stock picking? While both the uncertainty and the volatility are high an investment in a specific sector can be better managed through an ETF. In cases where an investor would like to build a position that is composed by wide list of holdings, sometimes in several steps, an ETF would be a better way to do it. Buying into a sector’s ETF allows to build a position in a by-step model. Another reason to prefer an ETF is the level of familiarity with the list of companies in the sector. Though all the sector’s companies were hurt by the recent selloff most of the investors will not know which of the companies are best to recover and which could be impacted by new regulations (in case it is not just a hot balloon towards election). An ETF allows to have a wide exposure and by that increase the probability to ride the right companies towards recovery. When looking at the list of Health care ETFs I found a list of 38 ETFs. The full list can be found here . Some of the ETFs are focused on the traditional big health care companies like Johnson & Johnson (NYSE: JNJ ), Gilead (NASDAQ: GILD ) and Pfizer (NYSE: PFE ). Others are focused on biotechnology companies like BioMarin Pharmaceutical Inc. (NASDAQ: BMRN ) and Biogen Inc. (NASDAQ: BIIB ). Some are focused on health care equipment companies and some in small biotech small startups. An investor can decide based on his or her risk profile the best ETF that suits his or her needs based on its mix and focus. Filtering the list As I like to start a list filtering by eliminating ETF that charge high management fees I have sorted out all ETFs that charge more that 0.3% per year. Surprisingly I was left with only four ETFs. (click to enlarge) The last four are: The Health Care Select Sect SPDR ETF (NYSEARCA: XLV ), which replicates Health Care Select Sector Index. The Vanguard Health Care ETF (NYSEARCA: VHT ), which replicates MSCI US Investable Market Health Care 25/50 Index. The Fidelity MSCI Health Care Index ETF (NYSEARCA: FHLC ) that replicates MSCI USA IMI Health Care Index. The PowerShares S&P SmallCap Health Care Portfolio ETF (NASDAQ: PSCH ) which replicate S&P SmallCap 600 Health Care Index. This list allows an investor to pick an inexpensive ETF based on his or her own risk tolerance. A quick comparison between the four: In term of performance, PSCH delivered the highest return in the last five years due to its more risky nature. Surprisingly it wasn’t harmed harder than the others during the recent month drop. Both XLV and VHT are tending towards the large cap health care companies. XLV seems to be more conservative as it shown by its average 18x P/E ratio versus the average of 32x. VHT has a significantly higher amount of holdings which are mostly small and medium cap companies that are trading at higher P/Es compared to the JNJs and PFEs. Conclusions: The list of four non-expensive ETFs can be examined by a long term investor who believes that the Health Care sector’s meltdown is only a temporary one. In term of the potential of long term gains, some would prefer the small cap ETF, PSCH. If looking for high diversification, VHT seems to be the best one. I picked XLV in term of risk/return tradeoff. I prefer an exposure to the big and strong companies of the sector. In any case, I suggest to plan a strategy of building a position in multiple steps. The volatility is still here and the correction can be dipper than anyone anticipates. Happy investing.

Biotech In A Bear Market. First Move? Don’t Panic!

It was a putrid week for biotech, partially triggered by a tweet from presidential candidate Hillary Clinton. The main biotech indices fell some 13% in five trading sessions. This sort of volatility is nothing new for this sector of the market. In fact, this is the fifth bear market for small cap biotech stocks since 2009. However, this too shall pass for this lucrative area of the market and brighter skies will return. Here are my time worn strategies for navigating the current turmoil in biotech. It doesn’t matter how one describes the action in the biotech sector this week, it was just plain ugly. The main biotech indices sold off ~13% including an almost five percent plunge on Friday even as the S&P 500 managed to end flat on the day. Investors in biotech have not been treated this much like rented mules by the market during one week in quite some time. (click to enlarge) Part of the deep pullback was triggered Monday by presidential candidate Hillary Clinton who tweeted her outrage about drug price “gouging” . She then made it part of her campaign as she tacks even further left for the upcoming primaries as a self-avowed socialist continues to gain against her in the polls for the contest for the Democratic Party nomination for president. It should be kept in mind that this type of electioneering is par for the course. Even if Mrs. Clinton is elected president and wanted to follow through on these primary promises, they have absolutely little to no chance of passing. The Republicans will still be charge of the House of Representatives and quite possibly the Senate. There are also no guarantees that Mrs. Clinton will be elected president or even secure the Democratic nomination for that matter. Who knows either her and/or Republican front runner Donald Trump might even develop a sense of shame at some point and withdraw from the race. In addition, this sort of turmoil is nothing new to this lucrative but volatile sector of the market. This is now the fifth time since 2009 that the small cap biotech sector has declined by at least 20% and entered an official bear market. The last time started in early March of last year. During that decline that lasted 6-8 weeks, large cap growth names in the sector like Gilead Sciences (NASDAQ: GILD ) fell back 20% to 30% before bottoming. Many small cap names plunged 50% to 70% before all was said and done. Given that I run the Biotech Forum on SeekingAlpha and approximately 40% of my articles here, on Real Money Pro and Investors Alley are centered on biotech investing; I have been inundated from questions from readers and subscribers this week. The quick downturn has caused a significant amount of anxiety. This is understandable but also part of investing in the biotech industry. I have been warning since the early summer that the overall market was overdue for at least a 10% pull back and that the biotech sector was quite possibly in a bubble as well. The weakness in the market should be no surprise and is also affecting other high beta sectors of equities with small cap stocks being down 3.6% this week as well. My first piece of advice is the same as the core theme of the cult classic “The Hitchhiker’s Guide to the Galaxy”. This is simply “Don’t Panic!”. This too shall pass. Thanks to algorithmic computerized generated trading now accounting for more than 50% of trading in the equity markets; these declines are getting deeper and quicker than they used to be as these programs decide to abandon momentum driven and high beta sectors of the market in nano-seconds. I have been successfully investing in biotech for over two decades. I have seen many such bouts of turmoil and I plan to see many, many more before I hang up my investing spurs. Over these periods I have developed several core principles to manage a well-diversified biotech portfolio that helps position these holdings to outperform the overall market over time while to help mitigate risk and lessen the overall volatility of the portfolio as well. My hope is that they can help readers manage through the current carnage in the biotech sector until sentiment once again turns positive on this part of the market. April 14th Article on Biotech Forum: The biotech & biopharma space is one of the most volatile of any of the sectors of the market. This is especially true as it relates to the small caps that make up a good portion of the companies that occupied the biotech & biopharma arena. It is not unusual to see a small biotech equity be listed as the top gainer of the day in the market with another small play in the space taking biggest loser of the day honors. Volatility is a fact of life for investors who want to invest in these high beta sectors of the markets. One does so because few if any areas of the market can offer up the five and ten baggers that are the stuff of dreams and can turbocharged the performance of one’s portfolio by just be fortunate enough to occasionally catch one of these “rockets”. Over the years I have identified many of these huge winners in the pages of SeekingAlpha including Lannett Group (LCI ), ZELTIQ Aesthetics (NASDAQ: ZLTQ ), Novavax (NASDAQ: NVAX ) , Avanir Pharmaceuticals (NASDAQ: AVNR ) and myriad others. Recently Eagle Pharmaceuticals (NASDAQ: EGRX ) has soared over 275% since I listed as a “Best Idea” on Real Money Pro on 12/19/2014. (click to enlarge) (click to enlarge) I have also had my share of disappointments like Regado Biosciences (RGDO) and Synta Pharmaceuticals (NASDAQ: SNTA ). It is simply the nature of the game. For every home run they will be at least one strike out. However, if managed right and optimized collection for small and large cap biotech & biopharma stocks can be a key contributor to overall outperformance from one’s portfolio over time. (click to enlarge) (click to enlarge) It is my passion and success in the biotech arena over the past two decades of investing that drove me to create the Biotech Forum which launched on SeekingAlpha early in April. I want to share my thoughts on how to properly manage and optimize a biotech/biopharma portfolio and some tricks of the trade have absorbed over many years of investing in this space. They will be the tenets of the Biotech Forum portfolio which will consist of twenty stocks. Five of these will be from the large cap space. These companies will already have achieve profitability, have solid products & pipelines and are selling at attractive or at least reasonable valuations on a long term investment basis. These will be labeled as “CORE” positions. The remaining 15 stocks will come from the more volatile and speculative small cap sector. These will be tagged with the “SPECULATIVE” moniker. Depending on your risk preferences you will want to weight each large cap selection three to six times heavier than each small cap pick. This will mean 50% to 75% of your portfolio will be made up of these more stable and less volatile large cap equities. The remaining portion of your portfolio we will go hunting for some multi-bag grand slams. This portfolio will be built slowly as I believe in dollar cost averaging in these areas. This sector has outperformed the overall market for five straight years and could be overdue for a pullback if sentiment sours on “risk on” areas of the market. Each month we will add one large cap pick and three small cap equities to the mix. Once we have our twenty stock portfolio we will make adjustments/modifications as we deem prudent over time. I will also offer up some future promising opportunities each month for those who might want to assemble a portfolio in a different or faster way than how we create the Biotech Forum portfolio. Our small cap selections will be focused on different technologies and disease areas to provide diversification. We will also look for concerns with multiple “shots on goal”, partnerships with larger players within the space, strong balance sheets which also could make attractive buyout opportunities. There are three terrible feelings when investing in small biotechs & biopharma stocks. The first is when a trial goes wrong or a company announces other disappointing news resulting in your investment cratering. Unfortunately, there is little one can do avoid these landmines as bringing a compound to market is a very complicated affair and is why one must make myriad small investments across promising opportunities in these sectors to provide diversification. The second thing that go wrong is when one makes an investment that comes at a very opportune time. Your stock doubles or triples in short order and you do not take any profits. Over time, the stock falls back to where you bought it or even lower and the feeling of regret of not taking any gains clouds future investment decisions. Finally, there are instances when your investment doubles or better and you cash out entirely only to see the stock triple or quadruple from there. I have had this happen many times over the decades and there are few worse feelings in investing. I have develop a rule of thumb over the year when it comes to small biotech stocks. It is to sell 10% of your original stake once one achieves a 50% gain, 20% of the original stake after the stock doubles and 20% more if one is fortunate to have your stock triple. The other half of the original stake now rides on the “house’s” money unless something drastically changes on the company’s prospects. That concludes a brief overview of some core themes that will be core drivers behind the formulation of our optimum twenty stock Biotech Forum portfolio.