An outstanding report just hitting the wires, in my view. Hugely useful to get to grips with the sector trading noise.
This is also very useful as a study of the shape of this recovery. Health care revenues have doubled from the 2007 peak. Earnings are 65% higher as one example.
Taking the prize for best management team the consumer discretionary stocks have really out performed. Their revenue is down but their earnings per share is up over 50% from 2007. That’s a stunning achievement. How do we explain this? I think the consumer discretionary stocks really slashed their costs in the 2008/9 crisis. They stopped all R&D. They expected consumer discretionary demand would fall off a cliff as the debt binge and housing ATM looked secular finished. I confess I forecast the demand picture as they did. How wrong could we be. Whilst revenues have not surpassed prior levels they have recovered. In real terms they are still well down of course but the key management response of hammering costs worked to propel a real terms increase in profits over the period.
I would now argue this makes the consumer discretionary stocks a big sell here. Having squeezed profits out of these operations over recent years capital investment, R&D and labor costs must now increase again. The tail wind of cuts costs is over for these cos. Now comes the difficult bit. I would therefore be taking profits from this sector and go under weight.
A fascinating and hugely useful report.
P.S. further to the alpha performance of the US health care sector from 2007 here a decent report on this decades old secular boom market sector.
And with Obama care just getting started it could be that the next wave up for health care revenue and earnings could be the biggest jump yet. See the Yardeni report above on Q4 earnings expectations for the sector.
The boom in health care spending is global but the US leads the pack spending a whopping 17.5% of gdp on health care at present but with this expected to grow considerably in coming years. In the investment world we continually seek the bubble sector and although health care seems a strange candidate the fundamentals look well founded to place on an every upward share of gdp. Hospital reits and long term care providers look good and currently high yielding picks to me. Many also trade at around half the sp500 ratio to earnings currently.
Rich