Is the move into health care stocks for real?
Big portfolio managers appear to be positioning themselves for the end of QE2 by rotating into high-yield, slow-growth sectors.
Is the rotation into health care stocks for real? We've had the health care service providers and medical device companies going up for months now, including WellPoint (WLP), Humana (HUM), Allscripts (MDRX) and Cerner (CERN).
Few groups have been as strong as the distributors McKesson (MCK) and AmerisourceBergen (ABC). AmerisourceBergen's target was bumped Monday by UBS. Davita's (DVA) price target was upped by Goldman Sachs. St. Jude Medical (STJ) and Edwards Lifesciences (EW) have been incredibly strong stocks. So has device maker C.R. Bard (BCR).
Now it looks like the old-line drug companies -- which I, among other investors, have written off -- may be catching a bid. Pfizer (PFE) helped the cause by selling one of its divisions, Capsugel, to KKR (KKR). (I am sure we will see a big equity offering within 18 months from that one, creating huge profits for KKR. How predictable is that?) Any breakup of Pfizer will be well received. Bristol-Myers (BMY) announced a breakthrough drug last week. Johnson & Johnson (JNJ) will not go down no matter how many recalls it has. And Abbott Laboratories (ABT) looks like it is breaking out on the charts.
Let's say the rotation is for real. As with all rotations, we have to decide whether it is simply catch-up or whether there is something else afoot. I think there's a coalescence of good things happening.
First, the Obamacare worries are behind the group. Anything bad that has happened is already in the stocks. Any repeal of any legislation isn't. Second, the group is still well behind the market when it comes to typical multiples. But finally, what may be lurking behind the move is a preparation by big money to move into a safety-oriented sector, anticipating the end of QE2.
With commodity inflation stronger -- as opposed to job or housing inflation -- and with job growth picking up, big portfolio managers may already be positioning themselves for the inevitable slowdown that comes from domestic tightening.
Given the size of the health care cohort, you know people need to have some weighting. The tendency had been to buy the highest growth non-pharma players. We may be experiencing a rotation within a rotation, with money gravitating toward the higher-yielding, slower-growth companies that are well behind the market.
I am not a fan of old-line pharma. I would rather bet on up-and-coming biotech or continue to play the service companies like WellPoint, which is owned by Action Alerts PLUS and is still very cheap even after the move.
But the rotation in undeniable, and the Pfizer sale Monday reminds us of how much fat and how many divisions can be sold in order to boost growth, boost dividends and buy back shares.
At the time of publication, Cramer was long WLP.
Follow Cramer's trades for his Charitable Trust.
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