Summer Update

 

Summer Lull

It’s been a while since I’ve checked in. July and August are the “depressive months” for teachers (mostly kidding). While I’ve been devoting more attention to my full-time duties, I’ve stayed as in tune with the market as ever.

By mid-summer, I was astonished by the resiliency of this bull market. It has digested uncertainty after uncertainty and continued to push forward. It’s as if it’s immune to policy, geopolitical, and economic turbulence — and there’s been plenty of that.

Federal Reserve leaders once again gathered in Jackson Hole, Wyoming — the annual summer get-together for top central bankers — to discuss future economic policy. (I should’ve been a central banker rather than a teacher.) It seems rate cuts are on the horizon. Markets were thrilled with this signal on Friday, but have since pulled back.

I have no clue what the near-term macroeconomic picture will look like. Truly, nothing would surprise me in the next several months. My focus remains on identifying multi-year bull cases and buying companies positioned to benefit.

The A.I. and tech trade seems to be cooling off, but corporate spending remains strong. Consumer-oriented companies, however, appear to be feeling some pressure from tariffs. Still, there are areas of the market I’m very excited about going forward.

Stock-Picker’s Market – Opportunity in Healthcare?

You’ll sometimes hear media pundits say market conditions are “set up for stock pickers” (I believe good stock pickers can always find opportunities). That seems to be the prevailing opinion now, and I agree.

Some areas of the market have run too far and are due for a breather. Others have been completely abandoned by investors and may present compelling opportunities. One such sector is healthcare.

Investors have been spooked by uncertainty in health policy and by companies struggling with poor profitability and rising costs. Industry titans like UnitedHealth, Elevance, and CVS have seen massive drawdowns. Major drug manufacturers and biotech companies are also trading at deep discounts.

This is an area I’m watching closely. I’ve already made a bull case for drugmaker Regeneron in an earlier post. They posted much better-than-expected earnings — and still got no love from investors. Now, I’m looking to take a position in market leaders within the health insurance space.

As always, this is my reminder: I’m not recommending you buy any stock, and I’m not providing financial advice. Do your own research and/or consult a financial advisor before making decisions.

With that said, I’m homing in on Elevance Health — a market leader in health insurance and a major provider of Blue Cross and Blue Shield coverage. Elevance is practically a money-printing machine with strong consumer satisfaction scores, at least comparatively. Profitability has dipped compared to historical levels due to rising costs, but that’s been the case across the industry.

UnitedHealth, the sector leader, has been cut in half for similar reasons, along with some company-specific issues. But here’s the point: this kind of setup is one of the best ways to make money as an investor. From time to time, entire industries face headwinds, giving you the chance to buy the best companies in that space at a discount.

I used this strategy in 2022 when tech faced a major sell-off — and made some excellent trades. My only regret was not leaning in harder. The challenge is determining whether these issues are existential or simply temporary.

It’s rare for a major sector like healthcare to face existential threats, though persistent challenges are possible. I see no evidence suggesting health insurers will remain less profitable for a significant period. My thesis is that these giants will figure out how to cut costs in the current environment.

Revenue certainly isn’t the problem — Elevance brings in nearly $190 billion annually and has grown revenue steadily for the last 15 years. The stock trades at less than 14 times earnings and around 0.4 times sales — dirt cheap. The stability in revenue growth leads me to believe profitability will recover, and at this valuation, I’m willing to bet on it.

Elevance isn’t the only company with this setup — it’s just the one I’ve done the work on. Hopefully, this gives you insight into how sector pullbacks can be hunting grounds for opportunity.

Watch for Sector Rotation to Present Opportunities

In recent weeks, there have been signs of sector rotation. Technology stocks — especially A.I.-oriented names — have been on fire for months. While the long-term thesis remains strong, investors seem ready to take some gains off the table.

I still believe in the outlook for high-quality tech and A.I. companies, and if there’s a meaningful rotation out of these names, I’m prepared to act on my favorites.

One company I’m watching closely is Micron. They’re growing earnings and sales at an exponential rate thanks to surging demand for memory products essential to A.I. applications. If they can sustain even a fraction of this growth, this name could be a big winner — especially given its reasonable valuation.

If we see a major sector rotation, there could be opportunities to pick up excellent growth companies at more attractive prices — something I’m watching very closely.

What Rate Cuts Might Mean

As I mentioned earlier, central bankers appear to be signaling that rate cuts are coming. Opinions are split on what this means.

Some economists believe it could signal economic trouble ahead. Others argue it could supercharge consumer, and corporate, spending. A large portion of real estate consumers have been on the sidelines waiting for a drop in interest rates. Based on the data I have now, I lean toward the latter — that rate cuts will boost both consumer and corporate spending, potentially taking this market to the next level.

Closing Remarks

Since April, this has been one of the most astonishing bull runs I’ve traded through. At these levels, I believe the market will punish anything less than stellar earnings or economic data — but so far, there’s been plenty of stellar data.

There are areas of the market that offer good value and opportunity, and others where caution is warranted. My focus remains on identifying great companies at good prices and sticking to my theses.

I hope these thoughts give you some insight into my ongoing process for achieving market-beating returns — and inspire you to refine your own approach.

As always, nothing here should be construed as financial advice. I’m not recommending you buy any stocks — just thinking aloud. Do your own research and/or consult a financial advisor before making decisions.

If you’re on your own investing journey - keep working, refining, and improving your process.

Cheers, 

Eric Patterson 

Main Street Investor

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