October 4, 2011

Today in Class:

The layout of the Fall 2011 Newsletter was discussed and the publish date was set for November 1, 2011.

Sector Reports

  • Healthcare (Holdings: CELG, TEVA, BMY) – BMY and CELG are both out-performing the S&P 500, yet TEVA is struggling.  Healthcare consumption has been rising every quarter in the past few years, however we see possible political risk present in several lawsuits that are challenging President Obama’s Healthcare bill.  Overall, we judge this sector to be risk averse, not volatile, and presents opportunities for high dividend yields.  The class has decided to overweight this sector.  See full sector report here.
  • Industrial (Holdings: GE, FSTR, UPS) – Industrials has been under-performing the S&P 500 but due to a 1.4% increase in construction spending in August and a full point increase in the PMI, we feel that it is best to stay neutral with the S&P 500 sector weighting.  See full sector report here.
  • Information Technology (Holdings: EBAY, IBM) – IT is a sector SMIF is very interested in, but we are wary of negative returns in the short run.  As spending is tied to global demand, we feel increasing our weighting and holdings would be ill-advised.  As such, we feel it is best to stay neutral.  See full sector report here.
  • Telecoms (Holdings: VZ) – Telecoms have high dividend yields and we will investigate diversifying our holdings, but will remain neutral with S&P sector weighting.  See full sector report here.
  • Utilities (Holdings: ED) – While the sector’s performance has been exemplary, we feel that prices are inflated and increasing in our position in utilities would result in future losses.  We will remain neutral with the S&P 500 sector weighting.  See full sector report here.

 

Read the entire class minutes: 10-04-11 Minutes

Industrial Sector Update

Holdings: GE, FSTR, UPS

Industrials has been under-performing the S&P 500 since mid-summer.  We feel this slowdown is temporary and expect a positive long-term trend by Q2 2012.  Until recently, the Purchasing Manager’s Index (PMI), a measure of the health of the manufacturing industry, has been trending downwards below 50, however there was news yesterday that PMI increased an entire point and construction spending was 1.4% higher in August.

We have identified that there is a large need to diversify and increase our holdings in the sector so that more large cap industrials are part of our portfolio.

Given our research, we feel that the best course of action is to stay neutral with the S&P 500 weighting.

 

Access the full report here: Fall 2011 Industrials Sector Report

 

Fall Information Technology Sector Update

Current Holdings: EBAY, IBM

We have identified that there are many opportunities outside our current holdings but because spending in this sector depends on the global economy we feel this is not the right time to invest in further companies.  Once we feel growth is imminent, we will look at companies like GOOG, which SMIF had previously owned but was sold off during the summer due to concerns about volatility.

SMIF is currently neutral with the S&P 500 but looks to change this position in the near future.

 

Access the full report here: Fall 2011 Information Technology Sector Report

Healthcare Update

SMIF Holdings: CELG, TEVA, BMY

BMY and CELG are both outperforming the S&P 500, yet TEVA is struggling.  Healthcare consumption has been rising every quarter in the past few years, however we see political risk present in several lawsuits that are challenging President Obama’s Healthcare bill. The supreme court decision on the three cases (Florida v. Department of Health and Human Services, No. 11-400; National Federation of Independent Business v. Sebelius, No. 11-393; Department of Health and Human Services v. Florida, No. 11-398) is expected in June 2012.  Until March, when the Supreme Court will start to hear arguments, we believe the sector is safe.

Overall, we judge this sector to be  risk averse, low volatility, and high yield.  We have identified that due to the complex capital structures of many companies in healthcare, SMIF must perform more analysis than previously thought to assess company dividend yields.

We are satisfied with BMY but plan to close out our positions in CELG and TEVA in the near future.  Ideally, we will pick up JNJ, LLY, and ABT.

The current SMIF recommendation is to overweight the S&P 500 by 100 to 150 basis points.

 

Read the full presentation here: Fall 2011 Healthcare Sector Report

Fall Utilities Sector Update

Holdings: ED

The utilities sector is more immune to market conditions than other sectors.  These companies are mostly government regulated and only susceptible to changing energy prices, but will always be in need.  They present high dividend yields and investors flock to these companies during downturns due to their safety.  Utilities are currently out-performing the S&P 500 by a significant amount, and U.S. utilities are out-performing global utilities as well.  Low interest rates will continue to drive the performance of the utilities sector.

However, there is a large concern that SMIF missed the boat over the summer and utilities prices are already inflated.  Thus, we will remain neutral with the S&P 500 sector weightings for the current period.

 

Access the full report here: Fall 2011 Utilities Sector Report

Fall Telecoms Sector Update

Holdings: VZ

The major news in this sector is the possible AT&T merger with T-Mobile.  We do not feel that it will occur because the created company would possibly violate antitrust laws and reduce competition in the marketplace.

Other research on this sector shows that pre-paid plans are rising in popularity as many Americans become unable to pay for pricey contracts, especially now that both AT&T and Verizon Wireless have gotten rid of their intermediary one year-long contract options.  Verizon Wireless has also followed AT&T in discontinuing their unlimited data plan, a move that might indicate that customers of both companies are not subscribing to the more costly, higher minutes per month plans.  The introduction of tiered data pricing also demonstrates the growing wireless data usage of smartphones in the U.S.

This industry is generally defensive but has on the whole been slightly out-performing the S&P 500. With consistently high dividends in this sector, we feel it is best to keep our neutral weighting, but look to diversify our portfolio with foreign providers, internet operators, and infrastructure owners.  Potential holdings include Dish Network (DISH), DirectTV (DTV), TimeWarner (TWX), and China Telecom (CHA).

 

Acess the full report here: Fall 2011 Telecoms Sector Report