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The yellow metal that's working. (Hint: it isn't gold)

The yellow metal that's working. (Hint: it isn't gold)

Quote of the week:

“The Vice Chair is the policy pulling guard for the Fed”  

- Steve Liesman, CNBC, reacting to comments from Lael Brainard last week that the Fed would reduce its balance sheet “rapidly” because reducing heightened inflation “is of paramount importance”.

What happened?  

For those unfamiliar with run-blocking assignments in football, the guards at the second and fourth position of a team’s five-man offensive line typically lead the way.

During running plays, guards are often tasked with getting outside to pick up blocks and plug holes, creating a path for nifty backs to slide through. Brainard’s signaling was significant because she’s long been a policy dove and her comments were designed to show cohesion, while paving the way for further aggressive Fed action to combat inflation.

Markets didn’t have to wait long for clarity on how far the Fed might be willing to go.

The Minutes from the Committee's March policy meeting were released Wednesday afternoon and demonstrated that the Fed, cognizant of persistent inflation following an expansion that saw its balance sheet balloon to $9 trillion, is now willing to dramatically expedite a runoff of its holdings.

The tightening schedule implies that the Central Bank is willing to reduce its Treasury securities by $60 billion a month, along with $35 billion in mortgage-backed securities – amounting to an aggregate $95 billion monthly drawdown.

As Barron’s highlights, that shift could add another 170bps of tightening to a market that is already pricing in a Fed Funds range of 2.5-2.75% by year-end.

Tightening fears, a lack of resolution in Ukraine, and increased volatility all played a part in a 1.3% weekly decline for the S&P 500, with the Nasdaq Composite reverting further, down 3.9% for the week.

Still, some themes bucked the trend.

What’s working in health care?

Health care stocks typically trade with a defensive tilt and outperform during market downdrafts. The need for health insurance, trips to the doctor, treatments for diseases, prescription drugs, and medical procedures all hold relatively constant regardless of the economic environment.

Toss in a healthy dividend plus expectations that the latest variant (BA.2) could trigger a fresh booster cycle to buoy vaccine makers and this sector logically drew inflows during last week’s choppy tape.

As a group, the XLV health care ETF added 3.5% – but a peak beneath the surface shows some significant dispersion amongst the sub-themes that drive this industry. Taking a look at other major funds in the space, the Vaneck Pharmaceutical ETF (PPH) bested its counterpart, adding 4.9%.

Compare it with Noonum:

Noonum gives you the ability to view two funds side-by-side and easily identify where the differences in their thematic exposure lie. While the pharma-specific PPH outperformed by ~1.5% last week, the spread between the two since the start of the year has been even more staggering:

YTD gains:

PPH: 9.1%

XLV: 1.38%

Noonum helps us to see what’s driving the difference.

XLV is a broad fund with representation across major drugmakers, healthcare providers, insurers, medical device manufacturers, and hospital conglomerates.

With PPH, an investor gets more pure exposure into the drug manufacturers – proven and long-standing drugs, but also the R&D pipeline.

Within this group, it’s been the drugmakers that have led the way.

While both funds share exposure to stalwarts like Johnson & Johnson and Merck, PPH has a ~4% weighting to Teva Pharmaceuticals (TEVA, +10.8% last week, +29.8% YTD) and 5.5% weighting to Astrazeneca (AZN, +6.48% last week, +22.1% YTD).

Clinical trials is another notable sub-theme that helps explain the story for these two funds. The pharma fund has nearly twice the exposure to “clinical trials” that XLV does – due in part to a core 5.5% allocation to Sanofi (SNY), which surged nearly 9% last week on optimism around a promising hemophilia drug that is in late-stage clinical trials. Meanwhile, XLV doesn’t hold Sanofi.

But it isn’t just concentration in drug manufacturers that caused the slippage in XLV.

Medical device manufacturers that trade like tech stocks

XLV also has a sizable allocation to Intuitive Surgical (ISRG) and Medtronic (MDT) – two of the largest medical equipment manufacturers.

Elective procedures have made a significant post-Covid comeback, but this is typically a higher multiple area within health care that often acts like part of growth tech. ISRG slipped 5.1% last week while MDT was flat.

Another effect may be adding to the recent weakness. Stocks are often held in a broad range of thematic products where any part of their business may fit a given narrative.

In the case of ISRG – it’s a health care device manufacturer, an innovation play, and a robotics story, meaning it’s represented in funds ranging from the Global X Robotics and Artificial Intelligence ETF (BOTZ - 8.22% weighting) to the iShares Medical Devices Fund (IHI - 4.1% weighting).

In a week where tech and growth are dumped indiscriminately, this can create a cascading effect for stocks that are sold as standalones, but then are also shed by active index managers as a result of fund outflows.

This is why it’s so important for investors to understand what they own in a given fund and where their true exposure lies.

How is sentiment changing? Which trends are driving gains or losses?

In short, greater exposure to clinical trials (with companies that saw positive sentiment), a higher allocation to generic drug manufacturers, and avoidance of medical equipment stocks – have all contributed to the spread between the broad-based XLV and the more concentrated PPH pharma fund since the start of the year.

For those looking for a more customized approach, Noonum can help there too. A quick search for “drugmakers”, “pharmaceuticals”, and “clinical trials” reveals Neurocrine Biosciences (NBIX) as a top result.

Exposure doesn’t predict performance, but NBIX has gained 17.5% as a company that develops treatments for neurological and psychiatric disorders. NBIX isn’t held in either the XLV or PPH funds.

Uranium miners get a lift

This is an interesting space that was left for dead in the years following the Fukushima nuclear disaster in 2011. Safety concerns prompted a transition away from nuclear power as a durable energy source, with countries across Europe and Asia planning a gradual phaseout of nuclear reactors.

A reversion to this trade began last summer and has accelerated in recent weeks due to a variety of factors.

Lack of clean energy alternatives – global advocacy to combat climate change and invest in renewable energy sources has brought substantial investment into wind and solar power. But these options have proven expensive and require a significant amount of land for construction.

There’s also the issue of capacity.

A complete transition from fossil fuels to wind and solar power simply isn’t feasible and wouldn’t be sufficient to satisfy global energy demand. The vulnerability of European dependence on natural gas from Russia has been exposed as a result of the war in Ukraine.

This has prompted European governments to reconsider their nuclear plans – Belgium had been slated to phase out all seven of its reactors by 2025 but has opted to reconsider, saying that removing nuclear power would “put its energy security at risk”. Elsewhere in Europe, the United Kingdom has announced plans for eight new nuclear reactors, while new German Chancellor Olaf Scholz has resisted calls to reverse his country’s departure from nuclear power.

Buying by the Sprott Uranium Trust - the Sprott Uranium Trust was launched in July of 2021 with the stated intent of buying and holding physical uranium ore, and acts as a liquid proxy for investors who want exposure to the commodity. It’s been buying physical uranium in spades and now holds ~55 million pounds and has a net asset value over $3.5 billion.

In November Sprott agreed to acquire the North Shore Global Uranium Mining Fund (URNM), an ETF that holds the companies that explore, develop, and produce the yellow metal. As with most other miner-commodity relationships, the stocks of uranium miners tend to track the commodity.

Possible Russian sanctions – Russia has been hit with a series of devastating and escalating financial and export-related sanctions since the start of March. Absent from the list to this point has been a ban on Russian uranium. The threat of Western sanctions against Russian nickel exports caused a violent rally in the commodity – with the London Metal Exchange (LME) halting its trade after prices more than doubled to north of $100,000/ton.

At 35% of global supply, Russia is the world’s largest source of enriched uranium for reactors. Taking Russian supply off the market could further squeeze uranium.

These forces all contributed to a 10.6% surge in URNM and will remain in focus in coming weeks.

Find it with Noonum:

This industry is loaded with small-caps that are available to discover and evaluate through Noonum.

A quick search of companies with exposure to uranium reveals the following names (with YTD gains):

  • NexGen Energy: NXE, +41.7%
  • Energy Fuels Inc: UUUU, +27.4%
  • Uranium Energy Corp: UEC, +64.2%
  • Cameco Corp: CCJ, +39%

What to watch this week:

More Fed speak to start the week as Chicago President Charles Evans delivers his assessment of the economy and inflation on Monday.

On Wednesday, we’ll get the monthly producer-price index (PPI) release, with sentiment readings from the University of Michigan out Thursday.

Q1 reporting season kicks off in earnest on Wednesday with JPMorgan Chase (JPM) and Delta (DAL) set to release earnings. Thursday features a slew of banks with Wells Fargo (WFC), Morgan Stanley (MS), Goldman Sachs (GS), and Citigroup (C).

Markets are shut Friday in observance of Good Friday.

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Disclaimer: all opinions expressed are the author’s own and nothing contained in this column is intended as financial advice

Position disclosure: URA