If your portfolio is heavily weighted to the healthcare sector, your returns for the last few months may be in need of medical attention. Healthcare stalwarts such as Cochlear Limited (ASX: COH), CSL Limited (ASX: CSL), and Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) have all declined around 20%. No doubt shareholders will be looking for answers, as is their right, but it is important not to start jumping at shadows.
Contrary to what their share prices infer, I believe the case for investing in each has actually improved over this period. Prior to the correction in prices, healthcare stocks were sitting on the higher end of historic valuations, while not reflecting the uncertainty surrounding the US election and the impact of proposed legislative changes under a Clinton administration. As such I believe with the election of Donald Trump this equation has been flipped on its head.
More good news came in the form of advice from the US federal reserve in October regarding its intention to raise interest rates sooner rather than later. The reason this is good news for the above mentioned companies is because as rates rise, a rise in the US dollar against the Australian dollar should follow. With each company deriving a significant slice of their revenues in US dollars, any rise in the US dollar will have positive impacts on the companies' bottom lines.
Company Guidance
While external factors are important, it is vital to also consider individual company metrics before making an investment decision. Here again, this lends support to my proposal that the investment case for each company has actually improved, with each company recently offering positive guidance in Net Profit After Tax (NPAT) for the next 12 months (see below).
- Cochlear – NPAT up 15% (mid-point)
- CSL – NPAT up 11%
- Fisher & Paykel – NPAT up 20% (over previous 12 months)
Foolish takeaway
While it is never pleasant to see your portfolio decline in value, it is important not to imagine fundamental problems where none exist. I am yet to meet anyone who predicted the market would rebound as strongly as it has under President elect Donald Trump, investors who were pragmatic and understood that the world was unlikely to end have been justifiably rewarded.
