Technology, healthcare and industries are good long-term investment bets
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The current highly volatile and bearish stock market this year makes this a daunting time for individual investors looking to identify companies with reasonable risk and good long-term growth potential.
Concerns about overall market performance – as of mid-March the S&P 500 index had had the fifth-worst start to a year since 1927 – mean investors are acutely aware of various negative forces: the highest inflation in 40 years, an expected series of interest rate hikes that have already begun and Russia’s invasion of Ukraine. So far, these and other factors have made 2022 a year of great uncertainty.
Uncertainty muddies the waters of the market, but investors willing to enter can do so with more confidence with insight to spot opportunities in the mud.
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Currently, three sectors – technology, healthcare and industrials – have relatively high concentrations of companies with low-risk characteristics, low valuations and good earnings growth projections.
Say yes to technology
Are there low valuations in technology? The flagship sector of growth stocks and the opposite of value investing? That’s right.
The sector’s price-earnings ratios have fallen significantly as prices have fallen this year. As of mid-March, at least 50 stocks in the Nasdaq Composite Index were down at least 50% from their highs, putting them well into bear territory. Market anticipation of interest rate hikes has also pushed prices lower, which tends to disproportionately penalize growth stocks with high P/Es, a common technology characteristic.
Yet even before this year’s plunge, Nasdaq 100 prices were on a slow decline that began in mid-2020. The cumulative effect: As of March 17, the average P/E of the index was 27, compared to 35 in August 2021.
This trend has accentuated the contrast between quality, profit-rich tech companies (some even paying dividends) and struggling companies that, like Icarus in Greek mythology, fly dangerously close to the sun with astronomical P/Es.
For example, in late March, high-flying Zscaler and Snowflake’s negative earnings meant they had no positive P/Es and forward ether P/Es of 400 and 1,356, respectively. But quality tech companies with real earnings are firmly entrenched in solid ground. For example, Oracle and Qualcomm in mid-March had forward P/Es of 8 and 15, respectively, significantly lower than the S&P 500 forward P/E of 19.
The higher a company’s P/E, the more investors pay for earnings and the less attractive it is generally, so high P/E stocks can drag indices down. Thus, the widening of the P/E spread argues in favor of active investing by buying individual stocks rather than passively by buying index funds or ETFs.
The new low-cost tech category is heavily populated by companies in the semiconductor industry, hardly surprising amid today’s unprecedented demand for chips, used in everything from cars to grids. -bread – and even to the toilet.
In addition to relatively low P/Es, some chip stocks — Applied Materials, KLA Corp., Lam Research and Qualcomm, among them — have other fundamentals indicating low risk, as well as projected average annual earnings growth. well into double digits over the next five years, according to Factset analysts’ average projections.
Yet tech stocks exhibiting these characteristics are not limited to the chip industry. Others include: Apple, Microsoft, Oracle, Seagate Technologies, Skyworks Solutions and VMware Inc. (Class A).
health care research
Health care costs haven’t risen as much as many articles have in recent months, but with or without inflation, people are going to seek it out, especially now that virus fears have subsided.
The big consumer group in this sector, of course, are baby boomers, many of whom have now reached their late 60s and are understandably seeking more care, including elective procedures they’ve postponed during the pandemic. The return of elective surgery bodes well for medical and surgical device companies like Medtronic, and will have a follow-on effect for other types of healthcare companies as those returning patients are being prescribed more. tests and medications.
Like technology, this is an area where passive funds may not be the best way to invest these days. Average valuations are now quite low, but equity price trends have been sharply divergent lately; it is a divided sector.
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In mid-February, biotech company AbbVie, pharmaceutical company Bristol-Myers Squibb and various care and service companies were at relative three-month highs. Meanwhile, many life science tools and services companies were at three-month lows, including instrument and reagent supplier Thermo Fisher Scientific, medical/industrial conglomerate Danaher and medical data science company IQVIA Holdings. Split pricing means that by buying healthcare funds, investors could get a lot of stocks that have risen in price.
The price divergence likely reflects investor confusion over the future of the sector in a generally uncertain market. It is therefore all the more important to focus on the fundamentals.
Healthcare companies with relatively low P/Es and good earnings projections include: Anthem, Cigna, CVS Health Corp., Danaher, HCA Healthcare, Humana, Merck, Mettler-Toledo International and Vertex Pharmaceuticals.
Watch the industrialists
Industrials are not a sexy industry, but investors are well aware that industries have to manufacture a lot of things to meet current demand.
As manufacturers step up to supply manufacturers with equipment and services, they face higher input costs. But many of these companies have pricing power in an environment where demand for many items far exceeds supply.
This sector has fallen less than most in recent weeks, but it hasn’t had to fall as much as prices have been fairly flat for about a year for some companies and even longer for others. For example, in mid-March, Cummins, which makes commercial gasoline, diesel and hydrogen fuel cell engines, was valued about the same as it was in 2018.
Supply chain issues remain, exacerbated by war in Ukraine, rising energy prices and Covid shutdowns in China. Yet, with the smoothing of the supply chain in the coming months, the growth of this sector is expected to accelerate. And to the extent that materials and parts are available in the meantime, manufacturers will pay more for them.
Companies with lower risk profiles, reasonable P/E ratios and good projected earnings growth include: Cummins, Deere & Co., Emerson Electric, General Dynamics, Honeywell, Norfolk Southern Corp., Parker-Hannifin, WW Grainger and United Parcel Service.
Of course, the same market forces have created good opportunities in other sectors. However, these three sectors currently stand out for their concentrations of attractive companies with good long-term potential.
— By David Sheaff Gilreath, Chief Investment Officer/Partner at Sheaff Brock Investment Advisors and Innovative Portfolios