On Monday, my editor, Darcy Keith, asked me what I was looking at buying for my portfolio during the current market upheaval. My initial reaction – “Nothing, really” – wasn’t at all constructive.
Domestically, we’re in the late stages, and possibly the end, of a credit boom that has seen housing prices jump 84 per cent since March, 2009, when the postcrisis U.S. equity rally began. The S&P 500 is higher by 342 per cent for the same period and the withdrawal of central bank monetary stimulus is now threatening profit margins and stock valuations.
I thought about it a bit more, remembering a quote from Jeff Bezos, the not-nearly-as-rich-as-he-was-a-month-ago CEO of Amazon.com Inc. When asked what the retail industry would look like decades from now, Mr. Bezos said that the question didn’t interest him. He was focused on what wouldn’t change, and that Amazon would continue to improve on its ability to provide more quality products, at lower prices, to customers’ front doors as quickly as possible.
The future for equity markets, both immediate and midterm, is murky at best amid fears about rising bond yields, global economic growth and credit-related wobbles in China.
But applying Mr. Bezos’s logic, there is one area in which we can make assumptions with near certainty. Fifteen years from now, the aging populations of the developed world and China will be that much older, almost certainly fatter and require more health care.
So health care is the equity-market sector where I’m looking for buying opportunities. Picking individual winners will be difficult, as always, but with the sector’s aggregate revenue growth arguably more assured than any other, the odds of success are higher.
Health care stocks are not without risks, which include the potential for government-imposed price controls on pharmaceuticals.
I probably won’t buy any stock that is not trading with valuation levels well below their 10-year average. Anything I consider buying will have a dominant franchise – no startups or high-flying newcomers that can be completely displaced by competition. To start, I’ll be looking at medical-equipment companies, which are often more attractively valued because they fly below the radar of many investors. For instance: Thermo-Fisher Scientific Inc., Zimmer Biomet Holdings Inc. and Medtronic PLC.
I’m happy I was asked the initial “What are you buying?” question, because now I have a game plan.
Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.
Scott Barlow