Looking to see what is working in the investment markets today and has a good probability of working in the future is a daunting task. No one really knows where the markets are going with true certainty, dear reader, the best anyone can do is make an educated guess. In order to guess one must have a good business sense and then take in all the available information and formulate an opinion upon which to act. The problem with the opinion making process is that the rules of old don’t necessarily work in the current paradigm and may have permanently changed. Even with a change in paradigm there are certain things that remain constant throughout history; basic human needs, human nature, and the life cycle. So while we as a nation and world are in unchartered territory from both an economic and geopolitical perspective there are still investible themes to be capitalized upon.
I am not a day trader or short term trader by nature as I prefer to identify an investment opportunity that will play out over a period of time instead of looking to turn a quick buck and run with the “hot” money crowd. Given my bias for investing and against raw speculation I am always on the lookout for companies that fit the mold of an investment which can trend for longer periods of time.
In the current environment I am trying to identify companies and trends that can profit and grow based upon factors which have the greatest resistance to market drivers. One theme that has been the subject of tremendous debate and argument is healthcare and the passage of Obamacare. Whether you feel Obamacare is a good thing or bad is irrelevant, instead it needs to be examined and looked at for investment opportunity. Obamacare appeared on the scene under the guise of providing universal coverage but has morphed into a healthcare cost containment program. Now we can debate all day if Obamacare will contain or drive costs, which if my home state of Massachusetts is any example it will escalate costs far more than imaginable, but I would rather focus on the investment angle.
If as is being widely touted the driver for Obamacare is cost then there are a few factors that need to be taken in to consideration. First, by the very nature of the idea we as a country are going to expand the pool of people receiving health services putting strain on an already burdened medical system. Second, the baby boom generation, those individuals born between 1945 and 1964, are approaching retirement age when healthcare demands tend to rise. Third, the increase in demand and limited healthcare dollars will drive further cost containment both through rationing and looking for price reductions.
Given the factors listed above the trend that is highly likely to benefit is the generic drug industry. Ironically, as the trend toward generics gains momentum there is the possibility that the development of new drugs will continue to slow as companies may not be able to recoup enough of the development dollars before the new drug would go generic, but that is a debate for a different post.
My favorite play on the healthcare theme and trend is an Israeli company in the generic drug space. The company is called TEVA Pharmaceuticals and trades on the NSADAQ(TEVA). TEVA trades with a PE of 19.44 vs the industry average of 22.4 and TEVA’s price to sales ratio is at 3.43 vs the industry at 19.6. Furthermore, TEVA sports a Price to book of 2.6 which is 57% of the industry average. Additionally, TEVA’s PEG(Price to earnings growth) ratio is 1.3 at current levels vs the industry which is 7.3. A PEG of 2.0 is considered undervalued relative to expected earnings growth. Moreover, TEVA’s quarterly earnings per share, year over year, is increasing at a rate of 50% while the industry is at 38%. Teva does provide a dividend of 1.36% as of this writing and has boosted it 25% over the last 3 yrs.
This is a stock on my watch list due to healthcare cost factors, the aging demographic of the baby boomers worldwide. I do feel it is attractively valued; however, it appears to be over extended at the time of this publication. Even though TEVA is in a sector with great long term fundamentals and sports a Beta of .2(meaning it does not really correlate with the S &P 500 performance); I feel that there are better entry points right around the 50 day moving average of $51.50. The caveat to this entry point would be that the decline from the current run up that broke the downtrend should be on average to below average volume if one intends to take a position.
Disclosure: I do not currently have a position in TEVA, but I am actively monitoring the stock for a good entry point. This is not a recommendation for purchase or sale only the author's personal opinion for educational purposes only. Moneta Advisors will not be held liable for investment losses resulting from using this advice. Please do your own due diligence and consult your financial advisor before investing.
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