HEALTH CARE REGAINING ITS STRENGTH
Fund manager sees opportunity after big meltdowns
Valuations are certainly near their historical highs, but investors can’t use that as a reliable timing tool. Nonetheless, it’s something they always have to be cognizant of, because when a trend shifts in the other direction, it often moves from one extreme to another.
“Everyone is pinning so much on Donald Trump, and he’s certainty produced a change of confidence among businesses and consumers, but it appears the U.S. economy was already starting to accelerate before the election,” said Bruce Campbell, portfolio manager at Kelowna, B.C.-based StoneCastle Investment Management.
StoneCastle is a subadviser to Redwood Asset Management for the Redwood Income Growth Fund and the Redwood Equity Growth Fund. It also manages the StoneCastle Fund for high net worth clients.
Strength in the U.S. economy came as a surprise to many, because it was only about a year ago that things appeared to be heading in the other direction, and a recession was on the horizon. But after some key economic numbers bottomed in February 2016, data has continued to improve.
Campbell likes to watch the ISM Manufacturing and ISM Services reports, which suggest there won’t be a recession for at least six to nine months.
When it comes to market indicators, he noted that things also look pretty promising.
The portfolio manager highlighted the fact that large caps were dominating the Canadian equity market up to about six months ago, but that trend appears to be changing.
“You’re starting to see a bit of a broadening out,” Campbell said, noting that while the banking sector continues to do well, for example, there has been somewhat of a slowdown compared to smaller cap companies.
“Now you’re starting to see some money flow into those sectors, so companies that have had strong numbers, or are building towards that, are starting to get recognized,” he added.
Until the positive macro picture changes, Campbell will remain on offence, and that’s reflected in the fact that the Redwood Equity Growth Fund is close to fully invested.
One opportunity the portfolio manager is taking advantage these days is in the health-care space, a huge source of interest roughly two years ago, as investors couldn’t get enough of names like Valeant Pharmaceuticals International Inc., Concordia International Corp. and Merus Labs International Inc.
The wind came out of the sector quickly, but Campbell is starting to see some relative strength returning.
“Some of the names we own continue to see an increase in earnings, and are getting some love from the stock market,” he said, highlighting CRH Medical Corp. (CRH/TSX).
“It’s not cheap, but they continue to have great numbers,” Campbell said of the health-care products and services company, which has adopted a roll-up acquisition strategy like some of its peers.
The manager also has a position in Centric Health Corp. (CHH/ TSX), a turnaround story that ended up with a large debt position after several acquisitions a few years ago.
Part of the company’s business is specialty pharmacies — filling prescriptions for long-term care and seniors residences.
“They’re not making money on the drugs, but are basically paid a dispensing fee,” Campbell said. “That’s a big part of their revenues, so when the fees were cut, the stock was put in the penalty box.”
However, a new CEO came in and the first thing he did was sell one of the businesses (for more than anticipated), paid down a bunch of debt, and is now building out the specialty pharma business through several deals in recent months.
“That will produce a ramp up in earnings,” Campbell said, adding that the other part of Centric’s business — surgical centres — could get a huge capacity boost if legislation in B.C. allows for more private services.
Another fund holding, Patient Home Monitoring Corp. (PHM/ TSX-V), is a former market darling that was left for dead, but is also now coming back.
The provider of in-home monitoring equipment and services to patients in the U.S. was pretty much buying everything it could about 18 months ago.
Campbell noted that the company was forced to rightsize its business, and recently posted its first cash flow positive quarter ever.
“They sold some of the businesses that weren’t making money and brought their costs down,” he said. “Once people get passed the bad taste in their mouths, they are going to see it is cheap. It’s growing at a huge rate, but the market isn’t really rewarding it yet.”
Some of the names we own continue to see an increase in earnings, and are getting some love from the stock market.