In this year’s first column I said that GDP would grow 3 percent or more in 2018. Few agreed, but now it’s a sure thing. Because of economic strength, I predicted that the Fed would raise interest rates and raise them again, frustrating President Trump along the way. They did. Expect more tweets. I also said that value stocks would begin to outperform growth issues. Until this quarter they didn’t, so the bulls liked Netflix, Facebook and Google. But that was then. Value stocks are playing catch-up now. The rotation from growth to value is just beginning.
Here’s how to profit:
The drug stocks used to be the premier growth issues, but given their relatively high yields and lower multiples today they are increasingly put in the value camp with a growth feature. Earnings are more predictable and not tied to the economy. The demographics (aging populations) form a powerful tailwind. If China opens up its market to foreign drugs, and they are beginning to now, that would be a powerful bullish catalyst. Pfizer (PFE) is up 21 percent this year and picking up steam as the value camp digs in.
Over the next few years, Pfizer expects to receive approval for 30 new drugs and 15 of them will have annual sales of $1 billion or more (called blockbusters). Merck (MRK) has done even better, that on the heels of its anti-cancer drug Keytruda, which alone accounts for 9 percent of annual sales and it’s growing fast.
Energy stocks are poster children for the value camp. They have assets, high yields and powerful tailwinds as demand for oil will steadily rise with supply hard-pressed to keep pace. Production in Iran will fall due to sanctions and fighting in Libya and Nigeria has curtailed production there. Who knows about Venezuela? The Saudis have a little excess capacity to fill in for cutbacks elsewhere, but they have no excess of low-sulfur oil, which is what buyers prefer and pay more for. BP Plc (BP) is the best positioned and best managed of the majors. It is also the highest yielding.
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