Healthcare Up 6.52% as Operating Results Exceed Expectations

Includes: INTC, JNJ, UTX
by: Ben Marks

The equities markets showed further strength in April, with the Dow Jones Industrial Average up 3.98%, once again indicating a preference for larger caps as it outperformed the S & P 500, which rose 2.85%, while the NASDAQ was up 3.32%.

Index Apr 2011 YTD 2011

DJIA + 3.98% + 10.65%

S&P500 + 2.85% + 8.43%

NASDAQ + 3.32% + 8.32%

During the past two weeks, about 300 of the companies in the S & P 500 reported earnings. Three-quarters of those reporting beat analysts’ expectations, 4 points ahead of the beat-rate in the prior quarter. Healthcare, a sector in which we are over-weighted in our Core Equity portfolio, performed best. This sector was up 6.52% as operating results and outlooks for Johnson & Johnson (NYSE: JNJ) (see below) and others exceeded expectations. The Financial sector was flat , underperforming once again.

Federal Reserve chairman Bernanke held his first press conference. In it he spoke of a slowing in economic growth in the first quarter to 2.1%; the following day just 1.8% growth was reported. We think Bernanke was optimistic when he also projected 3% growth for the full year. Given our concerns about the stubbornly high unemployment rate of 8.8%---plus the 5% who are wroking less than 30 hours but looking for full time work---we can expect ongoing government stimulus for the balance of the year. While recent food and oil price inflation have been high, Bernanke said that he is willing to forego a battle on inflation if that will help stimulate the economy.

In the meantime, municipal bond pricing could be bottoming in the near term. There has been media frenzy during the budget-setting season of many new governors, but experts believe there is a low probability that states or a number of major cities will default. Overall, yields are better than a year ago and are attracting hedge fund investors who normally do not participate. Credit quality is key to recent performance. In certain areas such as Minnesota, prices have been less negatively affected due to low levels of supply.

We are confident in our decision to over-weight Industrials. Several of our Core Equity holdings, as you will read below, are expected to benefit from rising capital outlays as the year progresses. As part of Federal tax legislation to stimulate economic growth, depreciation expense was accelerated leading to higher capital expenditures across production and service oriented companies. Those that have been stockpiling cash now have an incentive to spend.

During April we added Paccar, Inc. (NASDAQ: PCAR) to our Core Equity portfolio. Paccar is a market leader and best known as the manufacturer of Peterbilt & Kenworth trucks. Accelerated depreciation under this year’s tax legislation along with high odometers on existing trucks and rising volumes & pricing is driving demand across their industry. In our Alternative Strategy portfolio, we added the Coal ETF (NYSEARCA:KOL) due to rising global demand for the mineral combined with decreased likelihood of new nuclear plant approvals. In our International portfolio, we added the Turkey ETF (NYSEARCA:TUR) which is expected to benefit from high but manageable economic growth (approx. 8-9%) with a relatively stable political environment.

Stock News

Consistent with the themes of large cap, emerging markets, and technology, shares of Core portfolio holding Intel (NASDAQ: INTC) rose on earnings news this month. Revenues and profits rose 25% in the quarter and were well ahead of estimates, benefitting from corporate spending on major systems & storage. Earnings guidance was raised and the stock saw a number of rating upgrades. Approximately 50% of their sales are coming from emerging markets where personal computer sales are still growing dramatically. They in turn are increasing capital spending to raise needed capacity.

United Technologies (NYSE: UTX) was added to the portfolio in January. This month they reported 11% sale growth, with all divisions up due to increased capital spending by customers. Earnings per share also rose 11%. Cost of some materials rose, but margins rose due to fixed cost reductions over the last two years. Orders by division are up 15-35%, and earnings guidance for the full year was raised.

Johnson & Johnson has seen gradual sequential improvement across the board following recalls on consumer products and medical devices. Earnings guidance was raised. The company also announced its proposed acquisition of Swiss device maker Synthes for approximately $19 billion. Why Synthes? It is the leader in trauma components (plates, screws, etc) in the large and growing $37 billion orthopedic device market. J & J can use cash generated overseas without incurring US taxes, and ongoing taxes will be in the 15% area vs. 35% in the US, so it is expected to contribute to earnings in 2012. This acquisition also decreases the potential of J & J going after a major US device maker any time soon.

Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments and strategies may be appropriate for you, consult with Marks Group Wealth Management or another trusted investment adviser. Marks Group Wealth Management performs in-house analysis on companies. Statistical information on mentioned companies is obtained from company reports, news releases and SEC filings. The information set forth herein has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the securities, companies or industries involved. Opinions expressed herein are subject to change without notice. Additional information is available upon request. Past performance is no guarantee of future results. Stock investing involves market risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Precious metal investing is subject to substantial volatility and potential for loss. Commodities are subject to fast price swings which can result in significant volatility in an investor’s holdings. International and emerging market investing involves special risks such as currency fluctuation and political instability.