Healthcare stocks are outperforming this year and a portfolio manager who uses a sector-rotation strategy thinks the industry still has to room to run on Obamacare and positive fundamentals.
Despite well-publicized problems over the rollout of the federal health insurance exchange website, “the fact remains it’s happening for now and likely will not change,” says Alex Gurvich, co-founder and managing partner of the Rockledge Group, which manages the L2 Portfolio Covestor. “Obamacare is here to stay and it will drive up revenue and the bottom lines of healthcare companies because spending is going up.”
The L2 Portfolio employs a sector-rotation approach to potentially outperform the S&P 500 over multi-year time frames. The underlying investments are typically sector-based ETFs.
The strategy currently has a position in Health Care Select Sector SPDR (NYSE: XLV). The ETF’s tracking index top five holdings are Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE), Merck (NYSE: MRK), Gilead (NASDAQ: GILD) and Bristol Myers Squibb (NYSE: BMY).
Aside from the tailwinds from Obamacare, Rockledge Group thinks the healthcare sector is undervalued and attractive from a fundamental perspective.
“Healthcare is traditionally considered a defensive sector because we still need to spend on healthcare even in a weak or uncertain economic environment,” Gurvich said. “We are in a bull market yet this historically defensive industry is outperforming the S&P 500 this year.”
Outside healthcare, the L2 Portfolio is also bullish on materials, industrials, consumer staples and consumer discretionary stocks. Rockledge Group seeks to identify outperforming sectors based on the economic cycle, fundamental research, technicals and other factors.
“We want to invest in the sectors that are best positioned in the current market environment and will outperform the lagging sectors we don’t own,” Gurvich says. “Different sectors perform differently during various phases of economic cycles.”
Rather than investing in individual companies, Rockledge usually buys entire sectors with diversified ETFs in the L2 Portfolio.
“Most of the outperformance of a particular stock comes from the sector it is in. If a company is benefitting, then the entire sector is likely benefitting,” Gurvich added.
He said the allocations in industrials and materials reflect the model’s current preference for cyclical sectors.
“The U.S. economy is slowly on the mend,” he said. “It may be two steps forward and one step back, but the overall slope is up. That’s good for cyclical sectors like industrials and materials.”
Finally, he said the dual positions in consumer staples and discretionary are somewhat of an anomaly because staples are considered a defensive sector, while discretionary stocks are generally a cyclical play.
“We view staples as undervalued according to our model,” Gurvich said. Consumer staples are also in the portfolio as a defensive play because the model sees the market as a bit fragile after such a strong run for the S&P 500 so far in 2013, he noted.
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DISCLAIMER: The investments discussed are held in client accounts as of October 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
