This article focuses on the health care sector of the stock market. It is just one in a series of articles intended to share a mini-perspective on how I go about my work. Profiting in the stock market is a common goal for all investors. This work is an analytic process that has been successful for me for over 50 years.
Identifying the profitable component stocks of a sector is a simple process but
hard work. The components of my analytics are the companies within the sectors. Each company in the healthcare sector belongs to an industry group. By valuating the component companies within the industry group I can affirm and/or discard companies until I have identified the very best for buying. The same valuation process works just as well if we are seeking to identify companies for short sale.
Now with a little guidance and few more analytic tools we can start to make consistent annual profits.
Over the coming months, I will repeat this article on the healthcare sector from time to time. I will offer updates, i.e. Alerts (for buying) and Warnings (for selling) for the companies listed below. The companies are a representative group of the large-cap health care companies that should be familiar to all.
These large cap companies have competitors, within their industry group, that are what I call second tier companies. These companies often have better valuations and a lower risk / reward factor. So, these top tier companies always lead me to excellent second tier companies that I recommend for buying to my clients.
The first obstacle we must overcome is whether the company that valuates
well is technically a current buy, sell or hold. In my work, that is also rather easy, but investors must have the patience and discipline to hold cash until the company is ripe for buying.
You may want to refer to my Instablog article on "My Rotation Model."
Sectors: Ranking & Direction
ETF & Symbol | Ranking ( 60 - 100 ) & Direction (ascending / status quo / descending) | Most Recent Articles |
Basic Materials SPDR (XLB) | 72 - - descending | Coming Soon |
Energy SPDR (XLE) | 74 - - descending | Coming Soon |
Financial SPDR (XLF) | 76 - - descending | Last Week's - article |
Industrials SPDR (XLI) | 80 - - descending | This Week's - article |
Technology SPDR (XLK) | 80 - - descending | Coming Soon |
Consumer SPDR (XLP) | 81 - - descending | Coming Soon |
Health Care SPDR (XLV) | 78 - - descending | You are reading it! |
Utilities SPDR (XLU) | 72 - - descending | Coming Soon |
These rankings are modest but the word "descending" should get your attention.
If you are an investor who is seeking dividend income, my work will help you meet your objectives. Your inquiries are welcome.
Global Economic Crisis - - (mini-tutorial on when it all started)
Few investors understand that this thing is global. It is definitely not just Greece and Europe. The world economies are in more economic peril than you might think. The Global economic decline has been in process for longer than many people believe. It will continue for the foreseeable future and have a lasting effect on generations to come.
It was too subtle to recognize in the late 1990s when the first bubble broke, and the stock market lost 50% of its value. Economists and the financial gurus first recognized the problems in the middle of 2007 and into 2008. Since then, and around the world, stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.
On the one hand, many people are concerned that those responsible for the economic problems are the ones being bailed out. On the other hand, the global financial meltdown has affected the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided if ideologues supporting the current economics models weren't so vocal, influential and inconsiderate to others' viewpoints and concerns.
Following a period of economic boom, a negative financial bubble (global in scope) has now exploded.
A collapse of the U.S. sub-prime mortgage market and the reversal of the housing boom in other global economies have had a ripple effect around the world. Furthermore, serious weaknesses in the global financial system have surfaced. Many financial products have become so complex and twisted, that the system has begun to unravel, and trust started to fail.
Eight Valuation Criteria with their Status on the Healthcare Sector
Valuation Criteria | Status |
Earnings Growth: | The healthcare sector earnings peaked at in 2010 and have declined ever since. |
Price per Share: | It recovered from devastating losses beginning in 2008. The recovery 2009 to date is less than its value peak in 2007 and declining. My forecast: Down again for the foreseeable future. Healthcares have fallen by over 10% since early 2010. |
Forward Earnings: | The healthcare sector is flat to slightly up for the foreseeable future. |
Forward Revenues: | The healthcare sector revenues are continuing to decline from 2010. |
Forward Profit Margin: | Profit Margins have turning over the top since early 2011. |
Forward Price / Earnings Ratio: | P/Es are on the decline since 2010 and have turned down again. |
Long Term vs. Short Term Earnings Growth: | Longer term is flat, but the Short term has been declining since early 2011. |
PEG Ratio: | Healthcare sector PEGs are currently under 1.0 and falling. |
Valuation analytics is a time-consuming part of a financial analyst's day. However, the rewards far exceed the long hours and is necessary if you are seeking consistent annual profits.
Valuation Analytics Table - - Large Cap - Health Care Companies
Symbol | Price | Valuation Divergence (%) Six Months - One Year Projected from a Mean - Sigma and from the next Bullish or Bearish Inflection Point. (these are averaged for all companies and conservative numbers ) | Guidance (My General Remarks for the Healthcare Sector are: I never invest when the trend is against me. Currently, the trend is bearish; therefore, in many good valuations, I prefer holding cash. ) |
Johnson & Johnson (JNJ) ((Click (chart) for a 20-year chart) | $62.00 | Minus - 15+% | Cash is your friend in a bearish cycle of the stock market. |
Pfizer, Inc. (PFE) | $22.00 | Minus - 19+% | When the pull back begins again even the biggest and not so bad companies get eventually hurt. Stay in cash. |
Merck & Co. , Inc. (MRK) | $38.50 | Minus - 18+% | There will be more pull back so, stay in cash. |
Abbott Laboratories (ABT) | $61.50 | Minus - 13+% | There will be more pull back so, stay in cash. |
United Healthgroup, Inc. (UNH) | $57.00 | Minus - 20+% | The pull back may not be modest, caution is advised. Stay in cash. |
Bristol Myers Squibb Co. (BMY) | $34.00 | Minus - 15+% | BMY has not yet been hurt bad but there is downside on the way. Stay in cash for now. |
Eli Lilly & Co. (LLY) | $41.00 | Minus - 18+% | LLY does not valuate very well. |
Amgen, Inc. (AMGN) | $68.00 | Minus - 17+% | A very poor mover and not a good hold. Stay in cash. |
Medtronics, Inc. (MDT) | $37.00 | Minus - 15+% | Currently it is down nearly 20% and will come lower. Stay in cash. |
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Market Status
For the general market, I use the New York Composite Index and the Nasdaq Composite Index. Both are represented well by their respective ETFs: for the NY, it is the SPDR S&P 500 (SPY) and for the Nasdaq, it is the PowerShares QQQ Trust (QQQ).
Whether I am looking at a commodity or the general market, I am most interested in the identification of the ever-cycling bullish and bearish inflection points.
In my work, the identification of bullish and bearish inflection points is of critical importance. Because this is so critical, I also emphasize and use market "breadth" indices. Breadth does not have a tracking ETF; therefore, it was necessary to create my own excel charts.
These two indices, backed up with 'breadth,' is the foundation for my technical analysis. An axiom for the general market says: "the direction (trend) of the general market has a 60% influence on security's profits or losses." The following two charts (long and short-term) include SPY, QQQ and two of the companies presented in this article. I hope you can understand why this analytic exercise is so important to my way of managing assets.
For a graphic perspective of how the general market interplays with individual companies, please view my one and ten-year charts below.
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My opinion of the general market is that the fundamentals are over-valued; the technicals are over-bought, and the consensus opinion is way too bullish. I am currently a bear because my valuations are convincingly negative, and we are in a bearish cycle; it's just that simple!
Further support for my guidance for the general market can be read in my weekly Instablog article "Wednesday - General Market Update & Commentary."
Summary
Currently, the above tables and charts present a clear and not-so-positive account of these companies and the overall market indicators. It is a fact that, the stock market cycles endlessly both fundamentally and technically from bullish to bearish and then back to bullish again. Unfortunately, this is a pattern that is not well-understood or taken advantage of by most investors.
Within this present bearish time frame, there is nothing (longer-term) wrong with these companies. It is simple what happens when they turn bearish, and is just the on-going "cycling effect" of the way the stock market works. I hope you understand and will continue to follow my work / analytics for guidance. It won't be long before I can offer you a bullish and up-beat forecast once again.
May I remind you to take a few minutes to study my longer-term charts? When buying or selling, taking a longer-term look of a security's price history is often the difference between profits and losses!
Conclusion
I am bearish on both the world economies and the general market. My more recent Instablog postings are focused on securities that should not be currently held in your portfolio. I suggest that it is vitally important for you to understand that holding cash during questionable time frames in the marketplace is a much wiser choice than holding your present positions. I can assure you that; this is definitely a "questionable" time frame!
Further and on-going support for some of these companies current status will be posted this coming Saturday. My "Saturday Update" can be read weekly in my Instablog article.
Have fun, investing wisely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
