Health Care
The mini-consolidation in equities reflects the ongoing tension between market-supportive liquidity and a sketchy corporate profit backdrop.
The secular bond bull market is over. Safety is in a bubble. The shift from monetary to fiscal easing is the most likely candidate to prick the bubble in safety.
In this piece we revise our yield portfolio to increase its resilience to interest rate shocks.
The previous Insight showed that top-line growth for medical equipment companies was accelerating. It is notable that manufacturers' inventories of medical supplies are contracting at their steepest rate since 2009, which bodes well for factory utilization and pricing power. Moreover, medical equipment wage inflation has turned sharply lower. Higher sales, rising backlogs and a lack of cost inflation imply that there is scope for profit margin expansion. The latter is not factored into valuations, nor earnings growth expectations. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, DHR, BDX, SYK, BSX, ISRG, BAX, ZBH, EW, STJ, BCR, HOLX, VAR.
Health care equipment stocks are pulling back, but this is a correction from overbought levels rather than a trend change. Profit margin prospects remain upbeat. The surge in consumer spending at hospitals has encouraged an expansionist mindset, as highlighted by the surge in health care facility construction activity. The latter is highly correlated with medical equipment new orders, as a larger footprint will add to the volume of procedures performed over and above the increase from faster health care spending. Importantly, revenue gains also reflect global factors. U.S. medical equipment exports are set to return to a growth track, based on the upbeat message from the German IFO survey of medical equipment demand. Wage inflation is also in retreat, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, DHR, BDX, SYK, BSX, ISRG, BAX, ZBH, EW, STJ, BCR, HOLX, VAR.
The budding recovery in the S&P biotech index is likely to gather steam. Big pharma is desperate to replenish its drug pipeline, putting biotech equities back into play following a drawn out de-rating phase. This phenomenon is not limited to U.S. pharmaceutical companies, as European and Japanese firms are also racing to scoop up promising biotech assets. As a result, deal premia for coveted U.S. biotech companies have skyrocketed, hitting all-time highs (middle panel). Both the relative forward P/E and P/E/G ratios are sufficiently depressed to expect a wholesale re-rating as a low cost of capital and receptive markets embolden pharmaceutical companies to buy future growth (third panel). Bottom Line: We reiterate our recent boost to an overweight stance in the S&P biotech index. The ticker symbols for the stocks in this index are: BLBG: S5BIOTX - VRTX, CELG, GILD, AMGN, REGN, BIIB, ALXN, ABBV, BXLT.
Health care equipment stocks are overbought relative to the broad market, and a corrective pullback is inevitable. We had been concerned that the latest leg up might represent the final outperformance phase for this group, given rising wage inflation and a cooling in revenue growth indicators, but our conviction in the longevity of the cyclical bull market has been reinforced. Medical equipment demand is accelerating on a number of fronts. Domestic uptake is being driven by a rising number of procedures, as evidenced by double-digit strength in consumer spending at hospitals. That is a sustainable trend given rising income growth and broader health insurance coverage. Medical equipment exports have also reaccelerated. That is notable because it has occurred within the context of a flat, rather than weak, U.S. dollar. The implication is that demand from abroad is also on the upswing, as confirmed by the surge in the German IFO survey of medical equipment orders. As a result, backlogs should continue to build, ensuring that output growth stays on a solid footing. We recommend staying overweight. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, SYK, BDX, BSX, BAX, ISRG, EW, STJ, ZBH, BCR, VAR.
Shift to a small vs. large cap bias as a stealth way to play the overall equity market overshoot. The oversold bounce in banks is not worth chasing, and buy dips in medical equipment stocks.
The odds of an inflation "mini-scare" are rising, although deflationary tail risks from abroad cannot be dismissed.
With the broad market breaking out to new highs courtesy of flush liquidity conditions and rising risk appetite, the momentum-driven biotech group stands an excellent change of reclaiming previous relative performance highs. We upgraded the S&P biotech index to overweight a month ago because value had been fully restored and underlying fundamentals remained solid. For instance, demand-driven pharmaceutical pricing power gains remain intact, which is driving productivity improvement. Increased profit potential should attract renewed capital inflows and translate into higher share prices, especially now that the supply of biotech stocks is ebbing fast: biotech IPOs have cratered. Importantly, drug industry M&A activity remains robust, suggesting that the S&P biotech index has the potential for a re-rating. We reiterate our recent upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5BIOT- AMGN, GILD, ABBV, CELG, BIIB, REGN, ALXN, VRTX.
In successful investment analysis "less is more, and usually much more effective."