I know, I know. Obamacare is the worst idea since a Spice Girls reunion tour. It will stifle competition and kill capitalism. It will bankrupt the country and have us eating cat food in retirement. We'll all have to submit to the presidential death panel our DNA plus a 1,000-word essay on "What I would like to do next summer ..." in order to decide who gets an insulin prescription and who gets a sympathy card. Hey, did I mention the entire country's going commie?
Oh, I'm sorry. My mistake. You're a fan of Obamacare? Then rest assured; I understand your enthusiasm for the subject. Wringing costs out of the health-care system is vital. Clearly, the only way to do that is an enormous, government-run, reform program. Government being known for its efficiency and lean operations, a pillar of the reform must be thousands of pages of bureaucratic pronouncements on what insurance companies can offer, how hospitals should operate, and how much this should cost. This is the only way to shake the existing health-care establishment out of its complacency. If that means a few less ivory backscratchers for those Wall Street fat cats (who, by the way, have more money than you do. I'm just sayin'), then so be it. Also, did I mention those fat cats are rich?
Step away from the talk radio
I first penned those words about a year ago, when Obamacare was the hottest topic in the news. Since then, it has been displaced by bursting oil wells, troop withdrawals, and an economy that continues to limp. My point back then (which many readers missed) was that often, the shrill, brain-dead shrieking on both sides of an issue can create opportunities for investors who are looking to profit from the issue's "yuck" factor. I'm not going to try to pretend that health care has the same yuck factor that it did a year ago, but as I engage in my search for the market's best returning stocks, I have noticed that, as a group, health-care stocks haven't exactly been tearing it up.
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Large-cap Sector Index ETF
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1-Year Return
|
|
Telecomm
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22.9%
|
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Consumer discretionary
|
24.9%
|
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Industrials
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22%
|
|
Utilities
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14%
|
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Consumer staples
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13.1%
|
|
Materials
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11%
|
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S&P 500 Index ETF
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10.8%
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Tech
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9.5%
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Energy
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8.5%
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Health care
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4.8%
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Financials
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2.3%
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Source: Capital IQ, a division of Standard and Poor's.
Now it's true that among the small-cap stocks that I usually consider at Motley Fool Hidden Gems, the health-care sector ETF has done a bit better, but the performance is still lackluster compared to sectors like energy and consumer staples.
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Small-Cap Sector Index ETF
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1-Year Return
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|
Energy
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28.5%
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|
Consumer staples
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23.5%
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Consumer discretionary
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19.4%
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Utilities
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15.2%
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Health care
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14.8%
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Financials
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12.9%
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Russell 2000 Index ETF
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12.3%
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Materials
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10.9%
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Industrials
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10.6%
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Tech
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6.5%
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Telecomm
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(5.2%)
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Source: Capital IQ, a division of Standard and Poor's.
Sectors fall in and out of failure all the time as Wall Street sheep (and their Main Street followers) create bogus "macroeconomic" themes to sell, and pile in and out of the stocks that will supposedly benefit, or suffer, when their pronouncements come to pass -- and those rarely do.
Want to succeed in the face of this institutional idiocy? Then consider this basic fact: Invariably, the best way to make money is to get into the sector before CNBC is hyping it as the next great place to make a buck. And in my experience, the best way to do that is to simply concentrate your search in the currently unloved sectors, like health care.
The unloved sector
Some of you are no doubt thinking, "Make money in health care? This guy had better hope the psych panel hears his case soon." Hey, I am a guy who advocated buying BP (NYSE: BP ) the entire time the shares were being clobbered in the wake of the Gulf oil spill.
Here's why I make investments like that: Back in January of 2009, I recommended Autoliv to members of Motley Fool Hidden Gems. At the time, it was widely feared that the economy -- and civilization along with it -- was crumbling for good. Surely, no one would ever buy a car again, except for those kind you stop with your feet, Flintstone-style, on your way to the local caveman market meet to trade your shiny rocks for some clubbed squirrel. Therefore, all carmakers, along with car suppliers like Autoliv, were investments to be avoided like swine flu, or Tom Cruise.
Autoliv returned more than 260% from that point. I submit that it was precisely because it was so actively hated by those smart guys on Wall Street, and by everyone else who thought their macroeconomic pessimism constituted sober analysis. What everyone "knew," and feared, turned out to be nothing close to what actually happened. Ford (NYSE: F ) and even the-artist-formerly known-as-GM had to up production to deal with an uptick in car buying. Companies like Autoliv were priced for death, and when they didn't flat-line on the table (maybe they wrote a really good essay to the death panel), the stocks came charging back.
Same story, different sector
About the time I originally wrote this, I was asked to talk Google (Nasdaq: GOOG ) and tech stocks on CNBC's Closing Bell, because tech stocks were the sexy sector then. As one member of the parade of bland men in suits, I was hoping to distinguish myself -- at least somewhat -- from the crowd by refusing to play the hot sector game. In fact, as I explained to "Money Honey" Maria Bartiromo, the concept of the hot sector makes me uneasy. By the time a sector has attracted attention, many of the stocks in it have risen, some nonsensically, and bargains are harder to find. Enthusiasm for what's already popular might get you face time on CNBC, but it's likely to put your portfolio on long-term life support. (Google is up a paltry 1% or so over the trailing 12 months. I'm just sayin'.)
As Buffett has put it, you pay a high price for a cheery consensus. Luckily, the converse is also true. You get a bargain price for fear and loathing. That's why, to the extent that a "trees-not-forest" investor like me is interested in sectors at all, I'm much more interested in groups of companies that are feared or openly reviled. And right now, health care looks like it's one of those places where investors fear to tread.
There may be good reason for that, after all. Health care can be a brutal sector, even for the bigger companies. Johnson & Johnson (NYSE: JNJ ) has struggled with recalls and produced a pretty soggy, below-2% return over the past year. St. Jude Medical (NYSE: STJ ) has dinged investors for a 7% loss over the same period, despite a steady increase in revenues and improving margins. Big hospital chains like Tenet Healthcare (NYSE: THC ) and Community Health Systems (NYSE: CYH ) have been similarly forsaken by Mr. Market, despite their decent results.
Learn from the winners
But it doesn't have to be this way. In fact, in the weeks after I first suggested investors try to cash in on Obamacare, Hidden Gems members reaped some substantial rewards. At Hidden Gems, we concentrated our efforts on identifying companies that would likely thrive no matter how the health-care policy shook out. We purchased a pair of these, inVentiv Health and IMS Health, for our real-money portfolio. Mere months later, they were taken out by private equity buyers for nice premiums.
We made 50% on our money in weeks, and all because people were too busy screaming at each other to stop and think.
Foolish final thought
Those results may not be typical, but we certainly believe they're replicable. You can beat Mr. Market by looking in hated sectors for great companies, and buying the babies, so to speak, while they're being tossed aside with the bathwater. Given the continued malaise and occasional flare-up in the health care debate, I think you ought to devote a portion of your stock research to this sector.
At Motley Fool Hidden Gems, we're putting our money where my mouth is again. We continue to add promising, small health care companies to our stable of portfolio candidates, and just this week, we put real money into a company that is the leader in its market, yet hated by Wall Street. We paired that trade with a buy in a fast-growing health-care upstart that is stealing market-share from its moribund, large-cap competition. If you'd like to see where we hope to profit from Obamacare, a risk-free trial is just a click away. And as a special, double-secret-hated-sector bonus, my team recently produced an exclusive report featuring eight stocks from the oil patch. It's yours free with that trial.
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