Tag Archives: time

Pharma ETFs To Buy On String Of Q3 Earnings Beats

Like in the past few quarters, the healthcare sector continued to impress with its earnings in Q3. This is especially true as total earnings for 78.8% of the sector’s total market capitalization are up 12.5% on revenue growth of 8.4%, with earnings and revenue beat ratios of 83.3% and 61.1%, respectively. In fact, the sector is leading the way higher in terms of beating revenue estimates, where the overall growth picture of the S&P 500 is lagging. Among the most notable players, Johnson & Johnson (NYSE: JNJ ) was the first major drug company to report earnings on October 13, followed by Eli Lilly and Company (NYSE: LL ) on October 22. The other three major U.S. drug companies – Pfizer (NYSE: PFE ), Merck (NYSE: MRK ) and Bristol-Myers Squibb Company (NYSE: BMY ) – reported on October 27. All these industry primes outpaced our earnings estimates as well as raised their full-year outlook, while some missed on the revenue front. Johnson & Johnson’s Earnings in Focus The world’s biggest maker of healthcare products continued its long streak of earnings beats despite currency headwinds, which were responsible for the revenues missing our estimates. Earnings per share came in at $1.49, a nickel above the Zacks Consensus Estimate, but 7.4% lower than the year-ago earnings. Revenues slid 7.4% year over year to $17.1 billion and fell shy of the Zacks Consensus Estimate of $17.4 billion. In spite of the fact that a strong U.S. dollar would remain a major drag on international revenue growth, the company raised the lower end of the earnings per share guidance range to $6.15-6.20 from $6.10-6.20. The new midpoint is above the Zacks Consensus Estimate of $6.16 at the time of revising the guidance, reflecting confidence in its future growth. JNJ has gained 6.4% to-date since its earnings announcement. Pfizer’s Earnings in Focus The U.S. drug giant topped the Zacks Consensus Estimate for the top and the bottom lines, and raised its guidance for the fiscal 2015. Earnings per share of 60 cents and revenues of $12.01 billion were ahead of our estimates by a nine cents and $0.65 billion, respectively. Notably, earnings per share rose 5%, while revenues slid 2% year over year. Based on the earnings beat, Pfizer raised its revenue and earnings outlook for fiscal 2015. The company now expects earnings per share of $2.16-2.20 and revenues of $47.5-48.5 billion, compared to the previous outlook of $2.04-2.10 and $46.5-47.5 billion, respectively. The Zacks Consensus Estimate was $2.09 for earnings and $47.7 billion for revenues at the time of revising the guidance. Shares of PFE have moved up 2.6% since the earnings announcement. Merck’s Earnings in Focus Merck’s earnings per share came in at 96 cents, a nickel ahead of the Zacks Consensus Estimate and 6.7% higher than the year-ago earnings. Revenues slipped 4.6% year over year to $10.07 billion, and were slightly below the Zacks Consensus Estimate of $10.09 billion. For fiscal 2015, Merck raised the low end of the revenue guidance to $39.2-39.8 billion from $38.6-39.8 billion, including currency headwinds of $1 billion, and boosted the earnings per share outlook to $3.55-3.60 from $3.45-3.55. The Zacks Consensus Estimate at the time of the earnings release was pegged at $3.50 for earnings and $39.6 billion for revenues. The stock has added about 4.1% to-date post its earnings announcement. Bristol-Myers’ Earnings in Focus Bristol-Myers reported earnings per share of 39 cents, outpacing our estimate by four cents, but declining 13% from the year-ago earnings. Meanwhile, revenues climbed 4% to $4.07 billion and edged past the Zacks Consensus Estimate of $3.85 billion. Like the other drug makers, the company raised its full-year earnings per share guidance range to $1.85-1.90 from $1.70-$1.80, the midpoint of which was lower than our estimate of $1.82 at the time of the earnings announcement. Revenues are expected at $16.0-16.4 billion, which is at the low end of the Zacks Consensus Estimate of $16 billion. Shares of BMY are up 1.8% to-date since the earnings announcement. Eli Lilly’s Earnings in Focus Earnings of 89 cents at Eli Lilly strongly beat the Zacks Consensus Estimate by 13 cents and came in 22% higher than the year-ago earnings. Revenues slid 4% to $4.960 billion, and were marginally below our estimate of $4.962 billion. Eli Lilly also boosted its full-year outlook, with earnings per share revised upward from $3.20-3.30 to $3.40-3.45. Meanwhile, the company maintained its revenue guidance of $19.7-20.0 billion. The Zacks Consensus Estimate at the time of the earnings release was pegged at $3.27 per share for earnings and $19.9 billion for revenues. Shares of LLY have climbed 6.5% since the earnings announcement. ETF Angle The string of earnings beats and raised outlook has driven pharma ETFs higher from a one-month look. This trend is likely to continue for the rest of the year, given that the industry has a robust Zacks Industry Rank in the top 25% at the time of writing. Further, all these funds have a solid Zacks ETF Rank of 1 (Strong Buy) or 2 or (Buy), suggesting their continued outperformance (see all the Healthcare ETFs here ). iShares U.S. Pharmaceuticals ETF (NYSEARCA: IHE ) This ETF provides exposure to 43 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The five in-focus firms are among the top six holdings, accounting for 42.6% of total assets, suggesting heavy concentration. The product has $891.8 million in AUM and charges 43 bps in fees and expense. Volume is light, as the fund exchanges about 67,000 shares a day. IHE added about 6.9% over the past one month. PowerShares Dynamic Pharmaceuticals Portfolio ETF (NYSEARCA: PJP ) This is by far the most popular choice in the pharma space that follows the Dynamic Pharmaceuticals Intellidex Index. The product has AUM of about $1.6 billion, and sees good volume of around 233,000 shares a day. The fund charges 56 bps in fees and expenses from investors. Holding 23 stocks, PJP invests more than one-fourth of its assets in the in-focus five firms. The ETF surged about 8% over the trailing one-month period. Market Vectors Pharmaceutical ETF (NYSEARCA: PPH ) This ETF follows the Market Vectors US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. JNJ, PFE, MRK, LLY and BMY are among the top 12 holdings that make up for a combined 28.9% share. The product has amassed $338.6 million in its asset base, and trades in a moderate volume of about 72,000 shares a day. The expense ratio came in at 0.35%. The fund was up about 4% over the past one-month period. SPDR S&P Pharmaceuticals ETF (NYSEARCA: XPH ) This fund provides an almost equal-weight exposure to the pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of over $719.6 million, it trades in moderate volume of around 72,000 shares a day and charges 35 bps in fees a year. In total, the product holds 43 securities, with the in-focus five firms taking nearly 3% share each. The product has added 7.2% in the same period. Original Post

I Was Wrong About Shorting Volatility

I posited at the beginning of this correction that shorting volatility looked very enticing at current levels. That has turned out to be a terrible call as my belief that there would be a quick rebound in the equity markets was disproved. I’ll provide my outlook for the markets and shorting volatility going forward from here. Ever since the current market rout started, I’ve been salivating at the chance to get short volatility via the short term volatility ETF VXX (NYSEARCA: VXX ). This is a strategy I’ve used repeatedly over the past year or so to take advantage of buying the dip on a leveraged basis and it has worked very well. Unfortunately for me (and many others) this dip turned into a correction. My last post on the subject seems like ages ago at this point but if you’d like to see my rationale at the time, please take a look. Some time has passed and the landscape for shorting volatility has become a lot more complicated so in this article, I’ll update my views on shorting volatility and see what I think is next for markets and VXX. (click to enlarge) Obviously, I was too early. That comes from my steadfast belief in “buy the dip” that has developed over the past six years of this bull market. It has worked beautifully in the past but of course, this time it did not. This is why it is important to keep volatility-related positions small and why I always issue that warning in VXX pieces. I’ll issue it again here and offer that any position in VXX is, by its nature, speculative. Please keep positions small and understand that the potential for large rewards comes with the potential for sizable risks as well; the chart above shows this better than my words can convey. Now that we’ve established my original premise for shorting volatility this time around has proven to be unequivocally incorrect, let’s take a look at what may happen in the short to intermediate time frames with respect to the market and the VXX. The fact that the VIX is still elevated above 23 this many weeks into the correction is something I never thought would happen as it was beginning back in late August. I saw the spike down as just that and nothing more but obviously, we have something larger on our hands here. (click to enlarge) The VIX is showing tremendous ability to remain elevated and given the term structure at present, it appears traders think it will continue or even go higher. Credit: VIX Central We can see the spot VIX is near 24 while the front month is just over 22. But if we look further out, there is only a small drop in what the market is predicting volatility will look like several months into the future. While this isn’t unusual during a correction, there is real money on the line here so there are some traders with serious firepower betting on a sustainably higher VIX. The second mistake I made is in assuming contango would disappear quickly, as it had during so many quick down turns in the market in the last several years. As you can see, I made a pretty high probability bet that the spike in contango would be short-lived. Obviously, that is not the case. While contango has lessened significantly, it is still present. And as the down turn in 2011 showed us, it can stay that way for a long time. Given the way the VIX is behaving so many weeks into the spike, I have to think we are in for some more suffering before things get materially better. Now, these two conditions were the very reasons I originally put my short VXX trade so I’m not going against my system that has worked time and again; what I’m saying is that this time is different and requires a different approach. I found out this time was different the hard way – by losing money – but that doesn’t mean we can’t adapt and learn. First, I think the equity markets are in for some more selling before repairs can be made to the damage that we’ve seen in the past six weeks or so. We can see here that when the market (NYSEARCA: SPY ) broke down, it broke down hard and hasn’t looked back. (click to enlarge) The spike bottom has yet to be retested and the SPY formed a rising wedge pattern in the midst of a down trend, usually a bearish formation. We can see the formation was broken in the last week or so and stocks have moved down ever since. I think this wedge pattern coming to completion and the fact that there are no catalysts to buy mean a retest of ~187 on SPY is very likely and perhaps, even a move lower than that. The bottom line is my short to intermediate term outlook on the SPY is negative until we get a retest of the spike lows and until that happens VXX’s bias is up, not down. While the basic conditions of my short VXX trade are still in place (contango, elevated VIX) the one other major condition (a healthy stock market) has disappeared. That means VXX, VIX, and contango could stay elevated for extended periods of time and that means the short volatility trade is probably going to tread water or see another move lower in the coming weeks. I moved out of my short VXX position for a sizable loss because conditions changed and my reasoning for the trade in the first place evaporated. While taking losses is very painful, it is the right thing to do when you are proven wrong by the market. I will short VXX again at some point but I need to see a few things first. I need to see the SPY retest its lows successfully. That will mean a move down from current levels and some painful selling to set up a base that currently does not exist. Until that happens, shorting VXX is very dangerous. Second, I need to see the VIX sustain selling pressure. Until the market retests its lows the VIX is likely to stay elevated. That means shorting volatility in general isn’t going to work. Lastly, I think time is the final condition. This correction has taken a psychological toll on investors and that takes time to heal. Extremely volatile action like we’ve seen causes people to bail and until calm is restored, sustained buying pressure – and lower volatility – are going to be hard to come by. The time will come to short VXX again will come but for now, I’m out of this trade. I was proven wrong by the market so I’m licking my wounds until a better opportunity presents itself.

The Importance Of Your Time Horizon

I ran across two interesting articles today: Both articles are exercises in understanding the time horizon over which you invest. If you are older, you may not have the time to recover from market shortfalls, so advice to buy dips may sound hollow when you are nearer to drawing on your assets. Thus the idea that volatility, presumably negative, doesn’t hurt unless you sell. Some people don’t have much choice in the matter. They have retired, and they have a lump sum of money that they are managing for long-term income. No more money is going in, money is only going out. What can you do? You have to plan before volatility strikes. My equity only clients had 14% cash before the recent volatility hit. Over the past week I opportunistically brought that down to 10% in names that I would like to own even if the “crisis” deepened. That flexibility was built into my management. (If the market recovers enough, I will rebuild the buffer. Around 1300 on the S&P, I would put all cash to work, and move to the alternative portfolio management strategy where I sell the most marginal ideas one at a time to raise cash and reinvest into the best ideas.) If an older investor would be hurt by a drawdown in the stock market, he needs to invest less in stocks now, even if that means having a lower income on average over the longer-term. With a higher level of bonds in the portfolio, he could more than proportionately draw down on bonds during a crisis, which would rebalance his portfolio. If and when the stock market recovered, for a time, he could draw on has stock positions more than proportionately then. That also would rebalance the portfolio. Again, plans like that need to be made in advance. If you have no plans for defense, you will lose most wars. One more note: often when we talk about time horizon, it sounds like we are talking about a single future point in time. When the time for converting assets to cash is far distant, using a single point may be a decent approximation. When the time for converting assets to cash is near, it must be viewed as a stream of payments, and whatever scenario testing, (quasi) Monte Carlo simulations, and sensitivity analyses are done must reflect that. Many different scenarios may have the same average rate of return, but the ones with early losses and late gains are pure poison to the person trying to manage a lump sum in retirement. The same would apply to an early spike in inflation rates followed by deflation. The time to plan is now for all contingencies, and please realize that this is an art and not a science, so if someone comes to you with glitzy simulation analyses, ask them to run the following scenarios: run every 30-year period back as far as the data goes. If it doesn’t include the Great Depression, it is not realistic enough. Run them forwards, backwards, upside-down forwards, and upside-down backwards. (For the upside-down scenarios normalize the return levels to the right side up levels.) The idea here is to use real volatility levels in the analyses, because reality is almost always more volatile than models using normal distributions. History is meaner, much meaner than models, and will likely be meaner in the future… we just don’t know how it will be meaner. You will then be surprised at how much caution the models will indicate, and hopefully those who can will save more, run safer asset allocations, and plan to withdraw less over time. Reality is a lot more stingy than the models of most financial Dr. Feelgoods out there. One more note: and I know how to model this, but most won’t – in the Great Depression, the returns after 1931 weren’t bad. Trouble is, few were able to take advantage of them because they had already drawn down on their investments. The many bankruptcies meant there was a smaller market available to invest in, so the dollar-weighted returns in the Great Depression were lower than the buy-and-hold returns. They had to be lower, because many people could not hold their investments for the eventual recovery. Part of that was margin loans, part of it was liquidating assets to help tide over unemployment. It would be wonky, but simulation models would have to have an uptick in need for withdrawals at the very time that markets are low. That’s not all that much different than some had to do in the recent financial crisis. Now, who is willing to throw *that* into financial planning models? The simple answer is to be more conservative. Expect less from your investments, and maybe you will get positive surprises. Better that than being negatively surprised when older, when flexibility is limited. Disclosure: None