4 min read

Playing defense with drugmakers

Playing defense with drugmakers

Places to hide were few and far between to start the week, as the selloff that began last Thursday accelerated on Monday, with the S&P 500 shedding 3.2%, and at 3,991 marked its lowest close for the year.

Inching ever closer to bear market territory, the index is off 7.3% over the last three sessions and is now down a dizzying 16.3% for the year.

Particularly problematic for this market has been the lack of dip-buying. Every fleeting attempt at a rally over the last few weeks has been quickly sold. And yet, we still haven’t seen those defining signs of capitulation that typically signify a market bottom.

The market’s preferred fear gauge (VIX) is elevated, but at just under 35, sits below its early March level and well off levels reached in the early days of the pandemic.

Yet again tech fared even worse. The Nasdaq lost 4.3%, as market stalwarts Apple (-3.3%), Microsoft (-3.7%), and Amazon (-5.2%) have finally started to crack.

This feels as good a time as any to remind readers what we believe thematic investing is (and is not).

Thematic ≠ high growth.

Thematic ≠ high multiple.

Thematic ≠ overvalued.

A "thematic portfolio" is simply an expression of a thesis built on concepts and keywords that reflect natural language. It's a more dynamic and real world way of slicing the market into different buckets.

With Noonum, an investor can understand any theme that’s working or struggling in the market. From there, they can act on it and create a custom portfolio to invest in or hedge against a desired thesis.

Take today. All 10 S&P sectors finished in negative territory.

But in breaking down the individual themes driving Health Care (XLV, -2.59%) or Consumer Staples (XLP, -0.04%), some telling divergences emerge.

Defensive Drugmakers (it’s all about safety and dividends)

A hallmark of this correction has been investors’ inability to turn to bonds, especially Treasurys, which have plummeted alongside surging yields.

As a result, companies paying reliable dividends have provided relief and seen steady inflows during the recent market swoon.

With inelastic demand for treatments, pricing power in an inflationary environment, and stable payout ratios, drug stocks have acted as a major source of strength amidst the current selloff.

Three of the best performing stocks in the market on Monday were drugmakers that pay healthy dividends:

Amgen (AMGN): +1.2%, 3.28% div

Gilead (GILD): +0.8%, 4.77% div

Johnson & Johnson (JNJ) +0.5%, +2.56% div

The year-to-date outperformance for Amgen and Johnson & Johnson is even more impressive.

While the broader XLV Health Care ETF is off 10.3% this year, the two leaders have posted 6.3% and 3.7% YTD gains, respectively.

Chicken, Beef, and Some Snacks

Though investor appetite for revenue growth remains non-existent, healthy and stable profitability has made its way back in vogue.

Facing a rapid increase in energy, shipping, and feed costs, manufacturers of non-durable goods have shown an ability to pass higher prices through to consumers.

Tyson Foods’ earnings release Monday morning showed the enormous impact inflation has had on food prices.

While the meat processor revealed its cost of goods sold increased by 15%, it raised prices for meat by 23.8% and chicken by 14.4%. Healthy margins drove a sales and profit beat, leading the company to raise its full-year guidance, driving the stock up 2.2% in a weak tape. Tyson is up 6.5% so far this year.

The strong report follows similar evidence from other food and beverage companies, which have displayed impressive pricing power. General Mills (GIS, +2.9%), Campbell Soup (CPB, +3.5%), and Kellogg (K, +2.5%) all saw strong gains.

Investors looking for an ETF with exposure to the industry can find it through the Invesco Dynamic Food and Beverage ETF (PBJ), which has outperformed the S&P 500 by ~18% so far this year.

Meanwhile, sentiment around this theme hasn’t been carried over to the “plant-based” thematic camp. Beyond Meat (BYND) lost 13.1% today and is off a staggering 52.2% this year.

Home Improvement Bounces Back

Lowe’s (LOW) and Home Depot (HD) weren’t spared from the market’s spiral at the end of last week, but were a noticeable bright spot on Monday.

Both stocks finished in the green, with LOW adding 2% and HD up 0.9%, noteworthy outperformance that signals the pair may have found a level of support.

Home Depot is a 9.55% weighting in the VanEck Retail ETF (RTH), which also has a 4.47% allocation to Lowe’s.

Despite the strength of its two core holdings, RTH finished off 1.7% today.

This is where Noonum is critical in understanding the sub-themes driving fund exposure – both in knowing what you own and in evaluating two funds.

In addition to home renovation, RTH carries heavy exposure to e-commerce (Amazon, -5.2%), China (JD.com, -8.2%), and high multiple apparel stocks (Lululemon, -7.69%).

Meanwhile, the S&P XRT Retail ETF underperformed RTH, shedding 3.4%. Noticeably absent from XRT – home improvement exposure.

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Editor’s note: sign up for Noonum research at research.noonum.com

Want to get your hands on Noonum?

Email me at eamon@nooonum.com

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