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After Trump rally, equity investors move into healthcare, retailers

Stock MarketsMar 24, 2017 09:51AM ET
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© Reuters. A female shopper makes her way through an outdoor shopping mall in La Jolla, California

By David Randall

NEW YORK (Reuters) - High U.S. share prices are pushing Lipper Award-winning equity fund managers into the shares of beaten-down healthcare companies, retailers and emerging-market stocks that they say offer a greater chance for outsized gains.

Fund managers from Poplar Forest, Parnassus Investments and Brandes Investment Partners are among the 2017 Lipper Award winners who are concerned about the high valuation of the benchmark S&P 500 index. With a forward price-to-earnings ratio above 18, the index is at the high end of its historical range.

Even after tumbling on Tuesday, the index is up more than 10 percent since Donald Trump's unexpected U.S. presidential election victory on Nov. 8.

"It's absolutely harder to find stocks at attractive valuations" now than it has been in the past few years, said Todd Ahlsten, lead portfolio manager of the Parnassus Core Equity fund.

As a result, Ahlsten said he has been adding to his positions in healthcare stocks such as Gilead Sciences Inc (O:GILD), Allergan PLC (N:AGN) and Novartis AG (S:NOVN).

Healthcare stocks had fallen in price on concerns over possible drug price controls ahead of the vote on the Republican bill to repeal and replace President Obama's signature healthcare law. Shares of Gilead Sciences have slumped 5.5 percent since the start of the year; shares of Novartis are up 2 percent over the same time.

The vote, scheduled for Thursday, has now been postponed.

The S&P is up about 5 percent in the year to date.

"We feel like the rhetoric out there is creating opportunities," Ahlsten said.

J. Dale Harvey, portfolio manager of the Poplar Forest Partners fund, said he has been trimming his energy and materials shares exposure and buying into brick and mortar retailers whose stocks have come under pressure as Amazon (O:AMZN) continues to expand.

"Mall-based businesses are facing declining traffic, but we're trying to look for the proverbial baby thrown out with the bath water," he said. "So far that has been early, but we have a habit of being early."

He recently added a position in mall-based Signet Jewelers Ltd (N:SIG), which is looking to expand its number of freestanding stores. Shares of the company are down nearly 30 percent for the year to date and trade at a price-to-earnings ratio of 9.7.

"There's a lot of negativity embedded in its valuation that we think is not warranted," Harvey said.

Not every Lipper Award-winning fund is turned off by the high valuations, however.

Robert Marvin, portfolio manager of the Hood River Small-Cap Growth fund, said the recent stock market rally prompted him to buy recreational boat builder Brunswick Corporation (N:BC) and recreational boat and yacht dealer MarineMax Inc (N:HZO). Shares of both are up more than 10 percent in the year to date.

"We're starting to see significant improvement in demand as middle- and upper-income consumers feel the wealth effect," he said.

Kenneth Little, a co-portfolio manager of the Brandes Global Equity fund, said high valuations have left his fund "significantly underweight" the U.S.

Instead, his fund has been adding positions in emerging markets such as South Korea, Russia and Brazil, with large overweight in energy holdings and healthcare.

The fund is focusing mostly on large-cap companies such as Russian oil producer Lukoil, Brazilian aircraft maker Embraer SA, and South Korean auto parts maker Hyundai Mobis Co.

"The U.S., broadly speaking, looks pretty fully valued to us," he said. By comparison, in emerging market stocks, "if you look through the short-term challenges, you have very good companies trading at very attractive prices," he said.

Thomson Reuters Lipper is a division of Thomson Reuters Corp, the parent company of Reuters.

After Trump rally, equity investors move into healthcare, retailers
 

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