Australian Investment Blog

Last night US stocks rallied for a second day with the energy sector up 1.36% and the financials up another 0.9% but again the healthcare sector was a noticeable underperformer falling 0.27%. Markets are continuing to follow their seasonality path i.e. banks very strong in October followed by typical weakness in November, whereas the healthcare sector struggles in October prior to significantly outperforming in November / December. If the banking index is going to satisfy its usually strong October statistics we are likely to see some renewed strength from the anemic ASX200. So far October has seen a very tight 112-point trading range between 5386 and 5498. Remembering the "DOT Theory" a break of either of the two extremes is likely to at least see 125-point follow through if we simply apply the lowest monthly range of 2016 i.e. over 5600 on the upside and ~5250 on the downside.

ASX200 Monthly Chart

While short-term we remain comfortable with our overweight banking position, the question remains do we like any healthcare stocks at current levels remembering that the healthcare sector usually rallies over 4.5% from the end of October for the next 2 months. We only have exposure to CSL Ltd in the Healthcare space consequently today we commence exploring the sector as we consider switching from our overweight banking stance. So far in October the Australian banking sector is +1.9% while the healthcare sector is -1.6% clearly making a potential switch more attractive than a few weeks ago.

US S&P500 Healthcare Sector Quarterly Chart

Today we are going to simply look at 3 healthcare stocks on a technical level, with more to follow over coming days. We note that we still anticipate CSL range trading between $100 and $115 into Christmas, hence we have a targeted sell level around 6-8% above yesterday's close. The glove and condom maker Ansell (ANN) has had a very volatile 2016 trading in over a $10 range. This morning ANN reconfirmed earnings guidance for 2017 expecting underlying earnings per share growth of 4-7%. ANN is not overly expensive at present trading on Est. 16.6x 2017 earnings, however with mid-single digit earnings growth over the next 12 months, it’s certainly not deep value either. Technically we are buyers of ANN under $22, with stops under $20. This would be a shorter term positional play if taken.

Ansell Ltd (ANN) Monthly Chart

The hearing implant stalwart Cochlear (COH) has enjoyed a fantastic 2016 with the stock gaining well over 30%. The stock surged in August after announcing they anticipated annual profits to rise 20% following a strong 2016. Importantly they expect positive momentum to continue into 2017 from investments made in product development and market growth initiatives. The stock is trading on an estimated P/E for 2017 35x, which is well above its five-year average, hence its priced for good performance - CSL as a comparison is trading on an Est. 29.3x for 2017. Technically currently COH looks good buying around the $130 area, again this would be a shorter term positional play if taken.

Cochlear Ltd (COH) Monthly Chart

Healthscope (HSO) the Melbourne-based private hospital and medical centre operator plus international pathological services provider continues to trade around the $3 area. HSO is trading at the average end of town for the sector with a Est. P/E of 24.5x 2017 earnings, however, has a very good pipeline of growth project well underway. Technically we prefer the stock under $2.80 before considering.

Healthscope (HSO) Weekly Chart

Summary

Of the 3 healthcare stocks we looked at today, while we consider switching from banking stocks, the below are our 3 simple conclusions:

• We may look to buy ANN under $22
• We like COH around the $130 area.
• HSO would more be attractive under $2.80.

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Overnight Market Matters Wrap

• Stocks in the US closed higher last night after better earnings reports and higher oil prices. The Dow closed up 41 points (-0.2%) to 18,202. The S&P500 was up 5 points to 2,144.
• US Crude hit a 15 month high, jumping as high as 3% during the day after a surprisingly large drop in domestic supplies. US domestic inventories fell by 5.2 million barrels, which yet again kicked analysts’ estimates of a 2.7m barrel increase in inventories out of the park. Crude finished up US$1.13 (+2.2%) to US$51.42/bbl.
• Gold rose for the third day and breached the 200-day moving average amid uncertainty as to when a rise in interest rates will occur. Gold finished up US$7.10 (+0.6%) to US$1,267.90/oz.
• The ASX 200 is expected to open flat this morning, around the 5,439 level, as indicated by the December SPI Futures.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 20/10/2016. 7.30AM.

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