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Healthcare and Fidelity
10/01/2004 12:00 am EST
Jim Lowell is arguably the leading authority on Fidelity funds, offering in-depth coverage of the funds, its managers, and the best ways to develop portfolios based on this fund family. Here he adds a "contrarian" play in health care to his aggressive and growth portfolios.
"In the near-term, I suspect the usual suspects will rule and roil the markets at home and abroad: oil prices and Iraq. But speculation on either at the expense of strengthening economic data at home and abroad is a pessimist’s gambit that I’m not willing to play. Instead, we’ll continue to make our money the old-fashioned way; with our proven risk-adjusted investment discipline and our proprietary manager ranking system which lets us invest with confidence and not speculate on the headlines.
"I recommended adding Fidelity Select Health Care (FSPHX) as a contrarian trade in our Aggressive Growth and Growth portfolios. Why healthcare? We all know the reasons that make this broad market sector (inclusive of pharmaceuticals, HMOs, medical equipment, and biotechnology) a growth area for the long run. Demographics reveal an aging population whose demand for all these products and services will increase commensurate with that population, its wealth, and the supply of new treatments. Wed to a Boomer generation that is using healthcare to not go gently into the geriatric night (from whiter teeth to better hearts, knees, and hips), I think we have more than enough factors to lend credence to the belief that this sector’s strengths will outlive us all.
"However, in recent years, there have been numerous clouds on this sector’s horizon – with particularly rainy days for major pharmaceuticals based on internal manufacturing woes, external political pressure for pricing controls, and most recently, a heavy dose of election year ‘reform’ bringing back fears dating to Hillary-care in 1993/4. All of these issues have negatively impacted pharmaceuticals, and the group as a whole isn’t immune to downward pressure. In the HMOs, Cardinal Health was the most recent example of how bad news can shake a good company’s stock, and even a sector, dramatically. Biotechnology stocks continue to swing on the hinge of promising new drugs and failed clinical trials. On the medical equipment and systems side of the sector, concerns over the efficacy of products like stents can hit individual companies hard and fast and cast a shadow over related companies.
"The once profitable ground of healthcare stocks that made this sector look like a no-brainer – growing demand and double-digit earnings growth, shored up by political clout (as opposed to clouds), leading to better offense in market upticks and a better defense in downturns – requires care and attention if we’re going to be rewarded by investing here. The trades reflected my desire to position our more growth-oriented portfolios to benefit from the positive long-term fundamentals in the group (inclusive of their attractive current valuations), in light of their past underperformance and near-term pressures which, either way the election goes, are likely to set the stage for a reasonable near-term contrarian rally, as well as long-term peace of mind."
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