This week we talked to optical surgeon and 42-year investing veteran Robert Freedland about his new Healthcare model.
Covestor LIVE: What made you decide to create your Healthcare model?
Robert Freedland: I have been with Covestor for several years and was fortunate to be one of the initial models since early on in this process managing the Buy and Hold model since April, 2009. Looking to add another group of stocks to Covestor, it seemed a natural fit to look to healthcare as I am a physician and have a different perspective on this field than many others who look to understand trends and future growth possibilities in the delivery of medical care.
CL: What are some of the criteria you use to determine which companies with emerging medical treatments and technologies to invest in?
RF: At this point, the bulk of the companies that I have selected have been at one time or another investigated on my own blog, Stock Picks Bob’s Advice. For instance, Hologic (HOLX) is involved in women’s healthcare, a growing area of attention for our entire healthcare system. They offer digital mammography equipment to improve testing, and bone densitometry equipment, both addressing problems in innovative fashions. Quality Systems (QSII) is involved in the electronic medical record which is revolutionizing our healthcare industry as we switch from paper to digital records. Beyond this, the companies that I select generally have financial performance demonstrating that they have gone beyond ideas into successful applications of their products in the market.
As I do with my other model, I look for revenue growth, earnings growth, free cash flow, and acceptable valuation.
CL: This month, you sold Abbott Laboratories (ABT). What were some of the reasons behind the sale and the timing of the sale?
RF: As I have in my Buy and Hold model, and as I have written extensively about in my blog, I have chosen to continue to manage this model in my own strategy of limiting losses by quick sales at designated levels and slower partial sales as the stocks appreciate. After an initial purchase, a stock that happens to decline 8% is sold regardless of my own affection for the company. I also recently sold my shares in ResMed (RMD) for hitting an 8% loss level even though I do believe that that company has had a fabulous record of providing innovative products for sleep apnea to the market. I hope to revisit both of these stocks in the future should the opportunity arise.
In addition to this sale system, I allow these sales to influence my own exposure to the market by maintaining a significant cash position initially and adding positions as stocks hit appreciation targets on the upside and by ‘sitting on my hands’ with the proceeds when stocks are sold on the downside. I shall maintain a minimum of 5 positions at all times and reach a maximum of 20 positions should the existing cash allow. The size of positions shall also be determined by the existing size of holdings, adding new positions at 125% of the size of average holdings except when at the minimum portfolio size, in which case new holdings are added at 80% of the size of average to continue to reduce exposure while maintaining my 5 minimum holdings.
In other words, I sold Abbott (ABT) not because of anything that happened except that as I recently set up this model, things are still getting settled in for the long haul and a stock like ABT was unfortunately purchased at the wrong time in its own technical stock price cycle. The future of my holdings within my model are determined in what I have referred to a ‘natural selection’ process where the fittest survive! Alternatively, those who override what the market is telling them might be considered to be utilizing ‘intelligent design’. I am going to stick with Darwin in this model!
CL: One of your model’s top holdings is Walgreen Company (WAG). What are some of the factors that compelled you to buy WAG rather than CVS Caremark Corp (CVS) or Rite Aid Corp (RAD)?
RF: Walgreen (WAG) is a stock I have watched and owned over the years. In a Peter Lynch sort of style it is the drug store chain that I actually shop at as they have a stronger presence in Wisconsin than CVS or RAD. However, WAG has generally had stronger same-store sales figures over the last year or two than its rivals. It appears to be implementing its own strategy quite successfully and from my perspective is the 200 pound gorilla in its field.
Like each of the holdings, whether they be in retail sales, medical equipment, direct pharmacy sales, or even dental supply (PDCO), these companies have demonstrated their ability to be successful in their field and I have chosen to include them in my own model. Their continued presence in my model will not be based on my own affection for them or their products or services, but ultimately their own price performance in the market.
