Healthcare is providing good opportunities in the US as housing market weakness continues to dampen ...
Healthcare is providing good opportunities in the US as housing market weakness continues to dampen down consumer spending.
Stanley Nabi, vice president of Silvercrest Asset Management, has had success with stocks such as Polymedica, a company which produces direct-to-consumer diabetes testing products and services to seniors.
Nabi points out that although the company is worth $900m and has earnings of $70m, its capital spending amounts to just $10m and it therefore has lots of free cash flow to buy back stock.
He says: "The politically unpopular healthcare sector has lost its long-standing valuation premium and in many instances has descended to a significant discount even though all proposed policies call for expanded access to its services."
Alison Porter, head of US equities at Resolution Asset Management, is focused on small and mid-cap healthcare stocks where she believes there are better growth opportunities, and is underweight large cap pharmaceuticals.
In particular, she is optimistic about companies within the diagnostic sector which produce analytical instruments or software services.
Whole Logic is one such example. She says: "Whole Logic manufactures equipment for looking at bone density, and provides digital mammograms. It has recently merged with another company which produces diagnostic equipment for cervical cancer so it will be able to cross-sell."
While healthcare is providing opportunities, the housing market is still causing concern. But both Porter and Nabi believe the threat of a recession in the US remains low.
Porter says: "Bond yields will continue to put pressure on the housing market and the prime mortgage market. We do think that the weakness in the housing market and the rise in oil and gas prices are factors which are helping to dampen consumer demand and we actually see those as a palliative feature for industrial demand which remains very cautious."
However, Porter says corporate cash flows and demand from businesses remain very strong. She says: "We see the weakness in the housing market and the upward pressure from oil prices as being an offset to the strength elsewhere. This will help to contain any inflationary pressures."
Nabi believes housing activity will reach a trough later this year and that consumer spending will grow as wages rise at roughly 4.5%-6%. He says: "Stock prices do not appear to be at risk of a major correction and interest rates are not a threat to the market."
In particular, Nabi believes that quality mega caps have been undervalued. He has high weightings in companies such as 3M Co, Black & Decker Corp and Johnson & Johnson "Quality mega caps have been neglected. Hedge fund managers want volatility but these stocks don't offer that. We believe that these stocks are trading at a 15%-17% discount in relation to the S&P. They are the next slice of the market to be discovered."
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