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Happy Monday and week ahead! Today, we look at market updates from last week, an overview of the investment portfolio and finally evaluate healthcare stocks. Welcome to this 15th post of investing, not rocket science! Investing Doesn't Have to Be Rocket Science: Our Non-Expert Guide to Portfolio Management.
Equity markets began and ended the week on a positive note, with volatility in between owing to stress in the financial sector and the Fed Chair shooting down expectations of a rate decrease this year. Bond yields and the Dollar index ended lower for the week, while Gold and Crude Oil were up.
Key events and data last week:
· The Federal Reserve increases interest rates by 0.25%, to the range of 4.75% to 5%. Discussed in detail in the previous post.
· Existing home sales increased in Feb to 14.5% MoM as median sales prices was negative YoY for the first in 10 years.
· Amazon announced 9K job reductions, in addition to the 18K announced towards the end of last year.
· As the US contemplates a TikTok ban, its CEO Shou Zi Chew offers risk mitigation plan; “project Texas” to store internal user data in the United States.
· Shares of Block falls 17% on Hindenburg report that Cash App lacks controls and “highly inflates” its transacting user base.
· Inflation in the UK increased 1.1% MoM. CPI is up 10.4% YoY. BoE raises rates by 0.25%.
Portfolio News: Shares of Deutsche Bank falls sharply on Friday, down 14% in the day before closing lower by 8.5%. This followed a steep rise in its Credit Default Swaps (cost to insure bondholders against default). Asked whether Deutsche Bank could be the next Credit Suisse, German Chancellor Olaf Scholz said, “There is no reason to worry… Deutsche Bank has thoroughly modernized and reorganized its business and is a very profitable bank.” (Associated Press).
A quick recap of this series so far:
In the 1st post: I defined a basic portfolio framework. The objective of this million dollar investment portfolio is to beat inflation and an equity index. Using active portfolio management, without the use of leverage and a time horizon greater than 5 years. The benchmark index is the MSCI ACWI IMI.
From posts 2 to 14: I have evaluated 52 stocks and 4 potential bond additions. The portfolio is long 10 stocks, 1 Bond and short 1 stock.
Portfolio update:
· The portfolio is up +1.44% (from 14th Feb’23 to 24th Mar’23) while the benchmark index is down -4.03% in the same period.
· Asset Class: Equities, Bonds and Cash have all contributed to positive performance in the portfolio while Real Estate is slightly lower.
· Regional Allocation: Asia now has an exposure of 8.7%, Europe at 43% and North America at 48.3%. I think there is room for more exposure to Asia and South Americas.
Portfolio details:
· Deutsche Bank has fallen -27% followed closely by Citigroup (-14%). Later this week I intend to take a second look at these two stocks along with other stocks in the sector and evaluate if I should exit these, replace them, add to these positions or do nothing at this time.
· Google has gained +17.8% and is the largest gainer in the portfolio followed by Jd.com and Glencore. The short position in Nvidia is positive as well. Questions that needs to be answered eventually are how long should I hold this hedge? And when should I exit a profitable investment?
· The UK Gilt has fallen slightly compared to last week, owing to the inflation numbers in UK and the BoE decision to increase interest rates by 0.25%.
Today, I would like to evaluate the following Healthcare stocks: GlaxoSmithKline, Smith&Nephew, Sanofi, Novartis and NovoNordisk.
Why Healthcare stocks? Some of the reasons are:
· Long-term growth potential: The healthcare industry is expected to continue growing as the global population ages and demand for healthcare services and products increases.
· Defensive nature: Healthcare stocks have historically been viewed as a defensive investment, this is because people will always need healthcare, regardless of the state of the economy.
· Innovation and research: Healthcare companies are often at the forefront of innovation and research, developing new treatments, drugs, and medical devices. This can lead to significant growth potential if a company's products are successful.
· Diversification: Investing in healthcare stocks can provide diversification to your portfolio, as the industry is generally not closely tied to other sectors of the economy.
· Social impact: Many people choose to invest in healthcare stocks because they believe in the social impact of the industry, which is focused on improving people's health and well-being.
Company Financials:
· GlaxoSmithKline leads with a low Marketcap to Revenue multiple (1.9x) and high earnings yield (8.3%), however it has negative free cash flow margin and a current ratio lower than 1.
· Sanofi, although trading at a higher revenue multiple (2.7x), has positive free cash flow, a good earnings yield (7.2%) and an ideal current ratio at 1.4.
Efficiency, Valuation and Volatility:
· Novo Nordisk has a high operating income margin and low debt / equity. However, the stocks has a high PEG and price / tangible book value.
· Novartis and Smith & Nephew have negative PEG ratio, Novartis trades at 67x price to tangible book ratio.
· GlaxoSmithKline has a low PEG ratio followed by Sanofi. Operating income margin for both at 25%. However, GlaxoSmithKline has a negative price to tangible book ratio.
Trends in Company Financials:
· Sanofi shows relative consistency when evaluating trends in company financials.
· Followed by Novo Nordisk and Novartis, they check a few boxes while they struggle in some areas; Novartis is poor in revenue growth but does better in Operating Income Margin, Free Cash flow and Inventory days. While Novo Nordisk has a poor earnings yield but does well in Revenue growth, Operating income margin and free cash flow.
Fair Value, Upside Potential and Dividends:
· I assess fair value and upside potential using two methods: Discounted Cash Flow analysis and the Analysts Fair Value estimate. While the DCF method is objective, the analyst fair value is subjective to the view of the analyst. Both are important and an average of the two tends to provide a good indication of the potential upside.
· GlaxoSmithKline sees the most upside potential followed by Sanofi.
· Dividend yield: Sanofi leads the way followed by GlaxoSmithKline and Novartis.
Summary of the evaluation:
Based on the above, Sanofi is the stock that I would like to add to this portfolio. The semi Quant method that I introduced in the last post also favors the stock over the others (See chart below). On the charts however, the stock is trading in the upper end of the range and if sentiment turns negative, there is a 30% fall to the lower end of the range. This is a potential risk. Perhaps a lower exposure to begin with would be ideal here.
In the next few posts, I evaluate more stocks that can be added to this portfolio and look to answer the questions about the present holdings (such as Deutsche Bank, Nvidia, Google) in the portfolio. Thanks for your time! See you in the next post!
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