Q4 2016 CIO Insights: U.S. Value Equity
Typically, the presidential election cycle adds an extra layer of uncertainty to a market that can lead to an increase in volatility. New presidents in particular bring ambiguity in their policies and how those policies may or may not be implemented. Health care is currently a lightning rod for the candidates and thus vulnerable to election jitters.
Politics Create Financial Market Dislocations
Dislocations occur when financial markets misprice stocks due to noise in the markets. It occurs every day in varying degrees to hundreds of securities. Companies in the health care sector have been highlighted in political stump speeches, Tweets, and in the media. The coverage can move markets, such as when Hillary Clinton spoke out on the price of an allergy medicine. The pharmaceutical company’s stock immediately declined as did other specialty pharma stocks.
Politicians often target the Affordable Care Act (Obamacare), making remarks that sway the short-term price of companies in the managed health care industry. Should it be dismantled or adjusted for perceived deficiencies? The outlook for health insurance companies in managed care is debated and adjusted frequently, depending on the direction of the political winds.
The stocks of companies that make medical devices or operate hospitals can also be influenced by presidential election politics. Are the devices too expensive? Should hospital service charges be constrained? They may be great talking points, but can confuse the underlying investment issues.
Election Cycles Don’t Alter Our Investment Processes
Certain sectors and industries can be affected by an election cycle over a six- to 12-month time period, however, that does not necessarily change the long-term outlook for a given company. We see individual stock prices change often, sometimes with considerable volatility, while the underlying earning power changes more gradually.
As value investors, we look for equity securities of companies we believe are undervalued, with consideration for both upside potential and downside risk. The health care industry may offer several opportunities to find higher-quality companies that are temporarily mispriced.
Health care is a critical part of our economy that will continue to grow and innovate; we look for strong companies in the sector that can withstand temporary downturns in the prices of their stocks.
Pfizer, for example, is a successful pharmaceutical company with a strong balance sheet even after recently announced acquisitions, sustainable dividends, and a history of strong share buybacks. The company’s products include Ibrance, which treats advanced (metastatic) breast cancer; and Xeljanz, an oral drug for rheumatoid arthritis.
Merck is another higher-quality pharmaceutical company with a solid balance sheet, a sustainable dividend, and the financial flexibility to pursue potential mergers and acquisitions. Merck’s prized drug is Keytruda, a new type of cancer drug that unleashes the body’s immune system (immuno-oncology) to attack tumor cells. Both companies exhibit the qualities we seek as value investors.
Demand for health care isn’t dependent on a particular political candidate or party. It is a critical part of our economy that will continue to grow and innovate. Rather than fixate on the daily discussions and debates on health care, we will focus on finding strong companies in the sector that can withstand temporary downturns in the prices of their stocks.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
The opinions expressed are those of Phil Davidson, CFA, and are no guarantee of the future performance of any American Century Investments portfolio.
For educational use only. This information is not intended to serve as investment advice. Past performance is no guarantee of future results.