Archive for August, 2014

Financial Cyber Security: Paper Financial Statement Records Are Essential

Thursday, August 28th, 2014

QVM Clients:

Given the growing frequency and severity of hacker attacks on financial institutions (JP Morgan yesterday, for example), and given the estimated potential for information damage by an electromagnetic pulse weapon, I recommend that you keep paper statement for all of your investment, banking and other financial accounts.

We made the same recommendation back in 2011 in a SeekingAlpha article about personal financial security best practices.  It made sense then, and makes more sense now as the frequency and severity of attacks increases.

Stealing your account access data, or actually stealing your money in an attack on some institutions is bad, but probably compensable by the compromised institution or their insurers.  However, if a major foe  were to attack in a way that simply deleted or scrambled account data throughout an institution (or many institutions simultaneously) you may spend months or years waiting (and hoping) for recreation of your account data and access to your money, particularly if they were able attack backups somehow.

Data disaster sounds like science fiction, but simply keeping paper statements could make all the difference in the event that such an attack takes place.  Those with paper statements are likely to be resolved first (or at all).

JP Morgan,  which suffered a massive data breach yesterday, is reported to spend $200 million per year on data security, yet all that was penetrated.  They are likely as good as any institution.  The bottom line is your data, and perhaps access to your money is potentially at stake.

Print out or take mail delivery of paper statements, and retain recent copies just in case.

Best 3 Health Care Active Mutual Funds and Their 12 Top Consensus Stock Holdings

Saturday, August 9th, 2014

Except for one gas utility fund (GASFX), only Health Care mutual funds outperformed the S&P 500 over multiple long and short periods (including 2008) with “reasonable” volatility for return generated.

As we inspected those Health Care funds, we identified 3 that had the most attractive overall set of performance attributes.  They are:

  • (FSPHX) Fidelity Select Health Care
  • (JAGFLX) Janus Global Life Sciences
  • (PRHSX) T. Rowe Price Health Sciences

The top 12 individual stocks held by all three of those mutual funds are (with relative weights) as of last  available report:

  • (GILD) Gilead Sciences [17.90%]
  • (ACT) Actavis [14.60%]
  • (BIIB) Biogen [13.90%]
  • (CELG) Celgene [9.71%]
  • (ABBV) AbbVie [9.08%]
  • (ALXN) Alexion Pharmaceuticals [8.45%]
  • (VRTX) Vertex Pharmaceuticals [4.61%]
  • (TEVA) Teva Pharmaceutical Indust. [6.08%]
  • (VRX) Valeant Pharmaceuticals Intl [4.61%]
  • (HCA) HCA Holdings [3.72%]
  • (JAZZ) Jazz Pharmaceuticals [3.24%]
  • (HTWR) Heartware International [2.29%]

[Important Note:  This article is provided as an information aid to do-it-yourself investors.  This IS NOT a specific recommendation to buy or sell any security, nor a statement of suitability for any particular investor.]

THE  MUTUAL FUNDS

Here is how the mutual funds have done versus the S&P 500 (SPY) , the S&P 500 Health Care sector (XLV), and the Biotech sub-sector (IBB):

10-Years

3MF_10yr

2007-2009

3MF_2007-2009

 1-Year

3MF_1Yr

1-Month

3MF_1mo

 10-Year Comparative Accumulated Portfolio

The red line is based on owning the 3 mutual funds in equal weight and rebalanced monthly (no tax effect, so represents tax exempt or tax deferred account).  The blue area plot represents the S&P 500.  We did not provide dollar figures here simply to show the visual proportions.

The Health Care funds outperformed during the 2008 crash as well as over the full 10-year period. That does not mean they will necessarily outperform in a future bear market.  The world is different now than then, the Affordable Care Act not the least of the differences.  However, we are encouraged by historical relative performance.

HC_MF_TR

40-Quarter Performance Spread

This histogram presents the quarterly performance of the 3 funds in equal weight versus less the performance of the S&P 500.

HC_MF_Histo

3-yr,  5-yr and 10-yr Sharpe Ratio:

The 3 funds held in an equal weight portfolio had a significantly better Sharpe Ratio over 3, 5 and 10 years — less volatility per unit of return.

HC_MF_riskAlpha

Valuation and Operating Statistics

The 3 funds have higher P/E,  P/B,  P/S and P/CF valuations than the S&P 500 benchmark (but with higher growth rates, not shown).

The funds have lower net margin, lower ROE and ROA than the benchmark, due in part to the development stage of some of the biotech holdings.

HC_MF_ValOper

 

THE TOP CONSENSUS INDIVIDUAL STOCK HOLDINGS

The 12 top stocks held by each of the three funds substantially outperformed the S&P 500 as well as the 3 mutual funds over the past 10 years.

We must point out that those 12 stocks were not the top 12 consensus stocks throughout the 10 year period that the mutual funds were measured.  These stocks are a current snapshot of the funds’ holdings. There have been very recent developments, such as the Gilead Hep-C drug approval, which may not have had analogs in the past and may not have analogs in the future.

Here is how the individual stocks  have done versus  the S&P 500 Health Care sector (XLV), and the Biotech sub-sector (IBB):

HC1 HC2 HC3

10-Year Comparative Accumulated Portfolio

If the 12 stocks had been purchased 10 years ago and held in equal weight and rebalanced monthly in an account with tax deferral or tax exemption (such as an IRA, pension or foundation), this chart shows how the accumulated value of the stocks (red line) compares to the S&P 500 (blue area plot).  We did not provide dollar figures here simply to show the visual proportions.

They did much better relative to the S&P 500 than the mutual funds (noting that these stocks probably were not the top 12 consensus stocks 10 years ago).

HC_CrossAlloc_TR

40-Quarter Performance Spread vs. S&P 500

HC_CrossEql_Histo

3-yr,  5-yr and 10-yr Sharpe Ratio:

The top 12 consensus stocks help in equal weight produced a higher Sharpe Ratio than the 3 mutual funds held in equal weight — experienced less volatility per unit of return than the mutual funds.

HC_CrossEql_riskAlpha

Valuation and Operating Statistics

The 12 stocks have higher valuation ratios than the funds, and lower net margin, but somewhat better ROE and ROA.

HC_CrossEql_ValOPer

 

Valuation Metrics for the Individual Stocks:

HC_indivStlVal

 

These charts present the Revenue, EBITDA and Dividend payments over the past 10 years for each of the individual top 12 consensus stocks:

__ABBV __ACT __ALXN __BIIB __CELG __GILD __HCA __HTWR __JAZZ __TEVA __VRTX __VRX

Investment Quality Ratings By Wright’s:

Wright’s rates each stock by four key attributes: Investor Acceptance, Financial Strength, Profitability and Growth (using 8 criteria for each of the four attributes).  Investment Grade is defined as a rating of BBB4 or better. (see explanation of rating levels)

  • (GILD) Gilead Sciences [ABA15]
  • (ACT) Actavis [ABC6]
  • (BIIB) Biogen [AAA16]
  • (ABBV) AbbVie [ABA19]
  • (ALXN) Alexion Pharmaceuticals [AAA20]
  • (VRTX) Vertex Pharmaceuticals [ABNN]
  • (TEVA) Teva Pharmaceutical Indust. [ABB5]
  • (VRX) Valeant Pharmaceuticals Intl [ADNN]
  • (HCA) HCA Holdings [ALNN]
  • (JAZZ) Jazz Pharmaceuticals [ABC20]
  • (HTWR) Heartware International [LBNN]

Links to Yahoo key statistic data, Morningstar key ratios, BarChart short-term technical rating, and StockCharts price chart with some averages and technical indicators and the StockCharts Technical Rank for each of the 12 stocks are available here:

  • (GILD) Gilead Sciences || Y, M, B, S ||
  • (ACT) Actavis || Y, M, B, S ||
  • (BIIB) Biogen || Y, M, B, S ||
  • (ABBV) AbbVie || Y, Mo, B, S ||
  • (ALXN) Alexion Pharmaceuticals || Y, M, B, S ||
  • (VRTX) Vertex Pharmaceuticals || Y, M, B, S ||
  • (TEVA) Teva Pharmaceutical Indust. || Y, M, B, S ||
  • (VRX) Valeant Pharmaceuticals Intl || Y, M, B, S ||
  • (HCA) HCA Holdings || Y, M, B, S ||
  • (JAZZ) Jazz Pharmaceuticals || Y, M, B, S ||
  • (HTWR) Heartware International || Y, M, B, S ||

For those who want health care exposure, don’t need strong dividend income,  don’t want to research and monitor individual stocks positions, and want active management; the three identified mutual funds are an interesting choice.

For those who want health care exposure,  don’t need strong dividend income, and prefer to invest in individual stocks; some of the top 12 consensus stocks may be an interesting choice.