Tahoe Market Pulse: Stocks that may be 2017’s best performers
January 18, 2017
Which stocks will outperform the market this year? Here's a hint: Citibank created a model of 250 large global stocks in which they bought the prior year's ten worst performers and shorted the ten best. Last year the model was up 30 percent. The S&P gained 10 percent.
Why did it work so well? A year ago energy stocks were beaten down. Nobody wanted to own them, but they turned into one of the year's leading sectors as oil and gas prices rose.
So what was the weak sector in 2016 that might turn into the 2017 outperformer? Healthcare. Healthcare stocks lagged in 2016 due to concerns about future drug pricing. I'll bet they'll be among the best in 2017 as today's concerns about price pressures or controls are overblown.
Sure, there will be brief setbacks from occasional Trump tweets when he complains of high prices. As long as there are more pill takers than drug company stockholders the industry will be in the cross-hairs. But incoming HHS secretary Tom Price deplores price controls and the Republican-led congress will never approve them.
The healthcare industry will continue to benefit from the demand-boosting demographics. The larger drug and biotech companies have much going for them and research programs with hundreds of drugs in the pipeline.
Pfizer, for example, has 91 drugs in the three stages of patient trials. Merck is a leader in immune-oncology, one of the sector's hottest growth areas. With yields of 3.9 percent and 3.0 percent respectively, these are easy stocks to hold while you wait for better times.
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Instead of purchasing individual equities, investors can own several companies by purchasing a healthcare ETF. For example, the SPDR Health Care ETF (XLV) holds 62 stocks with the largest companies (think Johnson & Johnson, Pfizer, Merck, etc.) having the highest weighting. Its expense ratio is a super-low 0.14 percent.
A riskier ETF with more upside potential is iShares Biotechnology (IBB). Amgen, Gilead Sciences, and Celgene are its three largest holdings. IBB's expense ratio is 0.47 percent.
Investors who sold healthcare stocks last year created an opportunity to buy first-class companies at bargain prices. Demographics and aging populations here and overseas are in their favor and I'm not concerned about price controls.
At these prices and yields many stocks — Pfizer, Merck. Becton Dickinson, Amgen — are terrific bargains. Don't be surprised if they are among this year's best performers.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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