A professional investor tells MoneyWeek where he'd put his money now. This week: Gordon Elvey, senior fund manager, JOHCM US Opportunities Fund
One of the big questions in the US at the moment is: where is the housing market heading? The market is certainly softening as the steady rise in existing home inventories has shown, but in my opinion a collapse in house prices is unlikely. Rather, I would expect to see prices levelling off to a small decline, similar to that seen in the UK last year. Also, in line with the UK, I'm expecting a softening in US consumer spending, which, moving forward, will hurt retail earnings.
Interest rates are another major talking point in the US this summer. A further rise following the one agreed at June's Federal Reserve meeting is possible, but a slowing consumer and housing market will make it much more difficult to pass price increases on to the consumer. Increases in energy costs are likely to roll out of the inflation figures over the next 12 months, given that the oil price has stabilised. Market uncertainty as to where interest rates are headed can be seen in the Chicago Board Options Exchange's Volatility Index, which hit a three-year high in mid-June. At the same time, more than 30% of stocks in my portfolio have relative strength indicators below 30. The last time I saw this was March 2003, just before the invasion of Iraq, indicating a short-term bottoming of the market and perhaps signalling the start of a sustained market rally.
So, where am I investing at the moment? My fund is driven by bottom-up stock selection, while also taking into account a top-down overview. Given current top-down fears, including interest rate over-tightening and the consequent effect on house prices and consumer spending, it should come as no surprise that I have no holdings in housebuilders. I am also underweight in the retail sector, for the reasons mentioned above, and also underweight in banks. The appeal of the US market is its extreme diversity I do not have to be in sectors that are affected by current worries. The fund has overweight positions in healthcare and biotechnology stocks, sectors that will not be significantly affected by an economic downturn, should the reality turn out to be worse than anticipated.
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In the biotech sector, my holdings include Nektar Therapeutics (NKTR), which is about to launch an inhaled insulin product. The market is sceptical about this new diabetes medication, which avoids the need for as many insulin injections, but I think it will have a better uptake than the market is predicting. Currently, the stock is lower than it was two years ago, before the US Food and Drug Administration approved this product.
Cubist Pharmaceuticals (CBST) has an antibiotic on the market for MRSA. It's one of the few firms with an effective antibiotic and is expanding its label to treat different MRSA infections and planning a geographical rollout of the product.
We also like NutriSystem (NTRI), an online diet firm that's designed a programme based on the Glycemic Index - foods rich in good carbohydrates and low in fat. The firm delivers pre-packaged convenient meals to dieters. Sales and earnings continue to exceed analysts' forecasts. Another such firm, Medifast (MED), is starting to beat estimates on revenue and earnings. It has been under pressure due to a spuricious internet article, but this is a buying oppurtunity.
The stocks Gordon Elvey likes
Stock, 12mth high, 12mth low, Now
Nektar Therapeutics, US$23.22, US$13.63, US$17.21
Cubist Pharmaceuticals, US$26.87, US$13.33, US$23.50
NutriSystem, US$76.33, US$14.67, US$61.56
Medifast, US$21.24, US$3.61, US$18.83
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