One of the peculiar aspects of the market move upwards in 2013 is that the defensives have led the way while the traditionally more economically sensitive areas like technology have lagged. Indeed, anyone trying to construct a balanced portfolio is going to have to deal with the contradiction inherent in only wanting to buy value as well. What happens when the value is mainly within technology and therefore guiding you towards being overweight in the sector? What happens to your diversification dream?
While the market has been somewhat vindicated in the current earnings season (a lot of tech co’s have warned), I also feel that many medical companies are at the very least fairly valued. With this in mind I thought I would look at Covidien plc (NYSE:COV)’s latest results. Is it time to buy in?
What the Industry Is Saying
Don’t get me wrong. I like this company and its prospects and have held and written about it before. It has many good properties, but the market seems to have factored all of this–and more–into the share price. Moreover, going into the latest set of results there were some signs that the medical device market was a bit weaker.
For example Johnson & Johnson (NYSE:JNJ) generally gave a positive set of results, but there was a note of caution in its medical devices division. Apparently hospitals have been reporting that the levels of surgical procedures in Q1 were tracking weaker than forecast at the end of 2012. This is problematic because, if healthcare companies are cyclical at all, it is in areas like demand from elective procedures and surgery visits.
It is not a major problem for Johnson & Johnson (NYSE:JNJ) because it has plenty of other opportunities to grow earnings, and many of them are about internal execution (getting products back into the market, integrating Synthes etc) but for Covidien it spells danger.
Similarly, I noted that General Electric Company (NYSE:GE) reported that its healthcare division saw its performance a bit weaker than expected as hospitals were seeing pressures on their budgets. Again a diversified industrial like General Electric Company (NYSE:GE) can cover up any shortfalls elsewhere, but it’s worth noting that many of its solutions do come with relatively high ticket prices. So if you are worried about a global slowdown then General Electric Company (NYSE:GE)’s healthcare revenues are likely to give you a place to hide.