MW It's time to scoop up undervalued stocks in this critical sector of the economy
By Philip van Doorn
Expanding your horizons and considering neglected sectors can help you identify bargain opportunities while defending your investment portfolio from a stock-market decline
Some makers of medical devices and supplies are priced low relative to earnings power - and their stocks can be defensive components of an investment portfolio during market downturns, according to Julien Albertini of First Eagle Investments.
Most U.S. stock sectors are trading at high valuations relative to expected earnings. And if you are invested in the S&P 500 through an index fund, success has been rewarded because the index is weighted by companies' market capitalization. This makes for high concentration among a small number of stocks, as the large-cap U.S. benchmark index is expensive.
According to Julien Albertini, a portfolio manager at First Eagle Investments in New York and the firm's deputy head of global value, the U.S. stock market as a whole "is not cheap by any means," and some areas of the market are "very expensive."
"We see value in a few areas and healthcare is one of them," he said during an interview with MarketWatch.
Albertini co-manages the First Eagle Global Equity ETF FEGE, which was established in December and has grown rapidly to $623 million in assets under management. It follows a strategy similar to that of the $69 billion First Eagle Global Fund, which Albertini also co-manages. The First Eagle Global Fund was established in 1979 and is rated five stars (the highest rating) within Morningstar's "Global Moderately Aggressive Allocation" fund category.
Expensive U.S. sectors - mostly
As of Sept. 30, the First Eagle Global Equity ETF was 44.4% allocated to U.S. stocks, with 36.2% in stocks in developed markets outside the U.S., 10.4% in emerging-market stocks and 9% in gold-related investments.
So the U.S. market is important for this global fund. But the U.S. market is expensive if we look at forward price/earnings ratios for the S&P 500 SPX and for its 11 sectors. These are prices divided by rolling consensus 12-month earnings-per-share estimates among analysts polled by LSEG, weighted by market capitalization.
Here are the 11 sectors of the S&P 500 sorted by their forward P/E ratios relative to their 10-year average levels. The full index is at the bottom.
Sector or Index Forward P/E Forward P/E to 5-year average Forward P/E to 10-year average 5-year average P/E 10-year average P/E
Information Technology 29.6 116% 134% 25.6 22.1
Industrials 23.9 116% 126% 20.6 18.9
Communication Services 21.2 114% 126% 18.6 16.8
Financial 16.2 113% 119% 14.4 13.7
Consumer Discretionary 28.5 106% 118% 26.9 24.1
Utilities 19.8 109% 111% 18.1 17.9
S&P 500 index 19.3 107% 110% 17.9 17.5
Consumer Staples 21.4 105% 108% 20.5 19.9
Healthcare 17.1 101% 105% 17.0 16.2
Real Estate 36.4 90% 90% 40.5 40.6
Energy 14.8 108% 64% 13.8 23.0
S&P 500 Index 22.7 113% 121% 20.1 18.7
Source: LSEG
The information-technology sector is the most expensive according to this comparison, trading at a 34% premium to its 10-year average forward P/E. The full S&P 500 is trading at a 21% premium to its 10-year average P/E valuation.
The healthcare sector trades just above its five-year average P/E and a modest 5% premium to its 10-year average P/E.
Over the past five years through Monday, the S&P 500 has returned 110.7% with dividends reinvested. Here's how the sectors have performed:
The healthcare sector has been the second-worst performer among the 11 sectors of the S&P 500 over the past five years.
Getting back to the full S&P 500, the index is now 39.9% concentrated in its largest 10 component companies, according to analysts at Ned Davis Research. This is close to the peak level of 40.3% a month ago, which was the highest concentration for the benchmark since at least 1972, according to NDR's data.
If you have money in an S&P 500 index fund, you have been enjoying excellent performance. But the SPDR S&P 500 ETF Trust SPY is now 29.5% concentrated in five companies, including Nvidia Corp. (NVDA), Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, two common-share classes of Alphabet Inc. $(GOOGL)$ $(GOOG)$ and Amazon.com Inc. (AMZN).
Read: Why your S&P 500 index fund might be more risky than the internet bubble
Examples of bargain healthcare stocks
Albertini emphasized First Eagle's "long-term fundamental value-oriented" management style, with typical investment horizons of five to 10 years.
"We love to be contrarian and to look at sectors which are out of favor," he said.
Within the healthcare sector, Albertini pointed to companies that make medical devices used by surgeons and other healthcare providers. "What we find interesting is that the market is bifurcated between companies growing quickly and mature companies growing slowly," he said.
Among the rapid growers that he named were Boston Scientific Corp. $(BSX)$, Stryker Corp. $(SYK)$ and Intuitive Surgical Inc. $(ISRG)$. Looking only at P/E, these aren't cheap stocks. Boston Scientific trades at a forward P/E of 30.1, while the valuations are 25.9 for Stryker and 49.9 for Intuitive Surgical, according to LSEG.
Albertini pointed to Becton Dickinson & Co. $(BDX)$, which he described as having a dominant market share in the production of medical supplies and devices, including syringes, catheters, blood collection kits, infusion ports and "all the intravenous access systems." BDX trades at a forward P/E of 12.8.
According to Albertini, Becton Dickinson's "scale advantage translates to customer advantage, quality advantage and security of supply," making it "an ingrained franchise."
In February, Becton Dickinson announced a plan to spin off its diagnostics and life sciences business, with that unit to be merged with Waters Corp. $(WAT)$.
After the spinoff is completed, Becton Dickinson will be left with its core medical devices and technology business, which, according to Albertini, will be trading for about 11 times earnings. "So half the S&P valuation for what we think is a steady, defensive, simple and predictable cash-flow-generative long-duration franchise," he said.
Another medical-device maker that Albertini likes is Medtronic PLC $(MDT)$, which trades at a forward P/E of 16.4 and is large, with a market capitalization of $123 billion.
Medtronic "has gone through what I would call a lost decade, with slow growth, no operating leverage and they could not compound" earnings per share, Albertini said.
But he now sees the business regaining momentum, with new products, including the PulseSelect pulsed field ablation (PFA) system to treat Atrial fibrillation and the Symplicity Spyral renal denervation $(RDN)$ system used to treat high blood pressure.
He also cited Medtronic's strong market positions for other types of specialized equipment, including devices used for transcatheter aortic valve replacement (TAVR) - a procedure that is far less invasive than open-heart surgery.
The third healthcare stock Albertini mentioned was Bio-Rad Laboratories Inc. $(BIO)$, which has a market cap of $8.5 billion and trades at a forward P/E of 31.4. The company provides tools and equipment used for medical research. Bio-Rad's annual revenue of about $2.5 billion is evenly split between life sciences and diagnostics, Albertini said.
The business of making equipment and supplies used for medical research "historically has been a good area for investment, because scientists tend to be loyal," Albertini said. "If you want to run experiments over time, you want to make sure most of the experiments remain comparable. You keep using the same reagents and equipment to avoid white noise."
"This makes the business stable and predictable. About 70% of revenues at Bio-ad are recurring. The company dominates small niches," he said.
Albertini also said Bio-Rad was run conservatively, "with net cash on the balance sheet." And what he finds especially attractive is that the company owns roughly a one-third stake in Sartorius AG (XE:SRT), a medical-device maker based in Germany with a market cap of $18.4 billion.
On a sum-of-the-parts basis, since Bio-Rad's stake in Sartorius is worth about $6 billion, Albertini believes Bio-Rad's stock "is very discounted."
More about the First Eagle Global Equity ETF
MW It's time to scoop up undervalued stocks in this critical sector of the economy
By Philip van Doorn
Expanding your horizons and considering neglected sectors can help you identify bargain opportunities while defending your investment portfolio from a stock-market decline
Some makers of medical devices and supplies are priced low relative to earnings power - and their stocks can be defensive components of an investment portfolio during market downturns, according to Julien Albertini of First Eagle Investments.
Most U.S. stock sectors are trading at high valuations relative to expected earnings. And if you are invested in the S&P 500 through an index fund, success has been rewarded because the index is weighted by companies' market capitalization. This makes for high concentration among a small number of stocks, as the large-cap U.S. benchmark index is expensive.
According to Julien Albertini, a portfolio manager at First Eagle Investments in New York and the firm's deputy head of global value, the U.S. stock market as a whole "is not cheap by any means," and some areas of the market are "very expensive."
"We see value in a few areas and healthcare is one of them," he said during an interview with MarketWatch.
Albertini co-manages the First Eagle Global Equity ETF FEGE, which was established in December and has grown rapidly to $623 million in assets under management. It follows a strategy similar to that of the $69 billion First Eagle Global Fund, which Albertini also co-manages. The First Eagle Global Fund was established in 1979 and is rated five stars (the highest rating) within Morningstar's "Global Moderately Aggressive Allocation" fund category.
Expensive U.S. sectors - mostly
As of Sept. 30, the First Eagle Global Equity ETF was 44.4% allocated to U.S. stocks, with 36.2% in stocks in developed markets outside the U.S., 10.4% in emerging-market stocks and 9% in gold-related investments.
So the U.S. market is important for this global fund. But the U.S. market is expensive if we look at forward price/earnings ratios for the S&P 500 SPX and for its 11 sectors. These are prices divided by rolling consensus 12-month earnings-per-share estimates among analysts polled by LSEG, weighted by market capitalization.
Here are the 11 sectors of the S&P 500 sorted by their forward P/E ratios relative to their 10-year average levels. The full index is at the bottom.
Sector or Index Forward P/E Forward P/E to 5-year average Forward P/E to 10-year average 5-year average P/E 10-year average P/E
Information Technology 29.6 116% 134% 25.6 22.1
Industrials 23.9 116% 126% 20.6 18.9
Communication Services 21.2 114% 126% 18.6 16.8
Financial 16.2 113% 119% 14.4 13.7
Consumer Discretionary 28.5 106% 118% 26.9 24.1
Utilities 19.8 109% 111% 18.1 17.9
S&P 500 index 19.3 107% 110% 17.9 17.5
Consumer Staples 21.4 105% 108% 20.5 19.9
Healthcare 17.1 101% 105% 17.0 16.2
Real Estate 36.4 90% 90% 40.5 40.6
Energy 14.8 108% 64% 13.8 23.0
S&P 500 Index 22.7 113% 121% 20.1 18.7
Source: LSEG
The information-technology sector is the most expensive according to this comparison, trading at a 34% premium to its 10-year average forward P/E. The full S&P 500 is trading at a 21% premium to its 10-year average P/E valuation.
The healthcare sector trades just above its five-year average P/E and a modest 5% premium to its 10-year average P/E.
Over the past five years through Monday, the S&P 500 has returned 110.7% with dividends reinvested. Here's how the sectors have performed:
The healthcare sector has been the second-worst performer among the 11 sectors of the S&P 500 over the past five years.
Getting back to the full S&P 500, the index is now 39.9% concentrated in its largest 10 component companies, according to analysts at Ned Davis Research. This is close to the peak level of 40.3% a month ago, which was the highest concentration for the benchmark since at least 1972, according to NDR's data.
If you have money in an S&P 500 index fund, you have been enjoying excellent performance. But the SPDR S&P 500 ETF Trust SPY is now 29.5% concentrated in five companies, including Nvidia Corp. (NVDA), Apple Inc. (AAPL), Microsoft Corp. (MSFT), two common-share classes of Alphabet Inc. (GOOGL) (GOOG) and Amazon.com Inc. (AMZN).
Read: Why your S&P 500 index fund might be more risky than the internet bubble
Examples of bargain healthcare stocks
Albertini emphasized First Eagle's "long-term fundamental value-oriented" management style, with typical investment horizons of five to 10 years.
"We love to be contrarian and to look at sectors which are out of favor," he said.
Within the healthcare sector, Albertini pointed to companies that make medical devices used by surgeons and other healthcare providers. "What we find interesting is that the market is bifurcated between companies growing quickly and mature companies growing slowly," he said.
Among the rapid growers that he named were Boston Scientific Corp. (BSX), Stryker Corp. (SYK) and Intuitive Surgical Inc. (ISRG). Looking only at P/E, these aren't cheap stocks. Boston Scientific trades at a forward P/E of 30.1, while the valuations are 25.9 for Stryker and 49.9 for Intuitive Surgical, according to LSEG.
Albertini pointed to Becton Dickinson & Co. (BDX), which he described as having a dominant market share in the production of medical supplies and devices, including syringes, catheters, blood collection kits, infusion ports and "all the intravenous access systems." BDX trades at a forward P/E of 12.8.
According to Albertini, Becton Dickinson's "scale advantage translates to customer advantage, quality advantage and security of supply," making it "an ingrained franchise."
In February, Becton Dickinson announced a plan to spin off its diagnostics and life sciences business, with that unit to be merged with Waters Corp. (WAT).
After the spinoff is completed, Becton Dickinson will be left with its core medical devices and technology business, which, according to Albertini, will be trading for about 11 times earnings. "So half the S&P valuation for what we think is a steady, defensive, simple and predictable cash-flow-generative long-duration franchise," he said.
Another medical-device maker that Albertini likes is Medtronic PLC (MDT), which trades at a forward P/E of 16.4 and is large, with a market capitalization of $123 billion.
Medtronic "has gone through what I would call a lost decade, with slow growth, no operating leverage and they could not compound" earnings per share, Albertini said.
But he now sees the business regaining momentum, with new products, including the PulseSelect pulsed field ablation (PFA) system to treat Atrial fibrillation and the Symplicity Spyral renal denervation (RDN) system used to treat high blood pressure.
He also cited Medtronic's strong market positions for other types of specialized equipment, including devices used for transcatheter aortic valve replacement (TAVR) - a procedure that is far less invasive than open-heart surgery.
The third healthcare stock Albertini mentioned was Bio-Rad Laboratories Inc. (BIO), which has a market cap of $8.5 billion and trades at a forward P/E of 31.4. The company provides tools and equipment used for medical research. Bio-Rad's annual revenue of about $2.5 billion is evenly split between life sciences and diagnostics, Albertini said.
The business of making equipment and supplies used for medical research "historically has been a good area for investment, because scientists tend to be loyal," Albertini said. "If you want to run experiments over time, you want to make sure most of the experiments remain comparable. You keep using the same reagents and equipment to avoid white noise."
"This makes the business stable and predictable. About 70% of revenues at Bio-ad are recurring. The company dominates small niches," he said.
Albertini also said Bio-Rad was run conservatively, "with net cash on the balance sheet." And what he finds especially attractive is that the company owns roughly a one-third stake in Sartorius AG (XE:SRT), a medical-device maker based in Germany with a market cap of $18.4 billion.
On a sum-of-the-parts basis, since Bio-Rad's stake in Sartorius is worth about $6 billion, Albertini believes Bio-Rad's stock "is very discounted."
More about the First Eagle Global Equity ETF
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MW It's time to scoop up undervalued stocks in -2-
"The world has moved to new products, including ETFs," Albertini told MarketWatch. Advantages of an exchange-traded fund include investors' ability to trade in or out at any time during the business hours of the stock exchange where the fund is listed. ETFs also have tax advantages, including accounting rules that make them less likely to distribute taxable capital gains than traditional open-ended mutual funds.
ETFs also tend to have lower expenses than those of mutual funds. The First Eagle Global Equity ETF's annual expenses come to 0.79% of assets under management, which would mean annual fees of $79 for a $10,000 investment. First Eagle is limiting the ETF's management fee to 0.50% until at least Dec. 31.
The First Eagle Global Fund's Class A shares SGENX have an expense ratio of $1.10%, while the fund's Class I shares SGIIX have annual expenses of 0.86%. The Class A shares can have an upfront sales charge of up to 5%, depending on the size of the investment, but that might be waived on some brokerage platforms. The Class I shares have a $1 million account minimum.
So the ETF structure can be easier and simpler for investors.
Here are the largest 10 holdings (out of 85) of the First Eagle Global Equity ETF:
Company Ticker Forward P/E % of FEGE portfolio Samsung Electronics Co. Ltd. KR:005930 12.5 3.7% Alphabet Inc. GOOG 24.0 3.2% Oracle Corp. ORCL 37.9 3.1% Meta Platforms Inc. META 24.0 2.8% Becton Dickinson & Co. BDX 12.8 2.6% Prosus N.V. NL:PRX 16.0 2.4% British American Tobacco PLC UK:BATS 10.6 2.3% HCA Healthcare Inc. HCA 15.4 2.3% Taiwan Semiconductor Manufacturing Co. Ltd. TSM 24.6 2.0% Barrick Mining Corp. B 11.0 1.9% Sources: First Eagle Investments, LSEG
Competing ETFs
The First Eagle Global Equity ETF is benchmarked against the MSCI World Index XX:990100, which is made up of 1,320 large-cap and midcap stocks in 24 developed economies.
Since the ETF was established in December of last year, we are also showing the performance of the First Eagle Global Fund's Class A shares, excluding any sales charges. Below that is the iShares MSCI World ETF URTH, which is passively managed to track the MSCI Global Index. There are five additional ETFs whose managers benchmark performance against that of the MSCI Global Index, according to data supplied by LSEG. Fund returns are through Sept. 30. These last five ETFs are sorted by launch date, ascending.
ETF or mutual fund Ticker 1-year return 3-year average annual return Net Expense Ratio Gross Expense Ratio Launch Date First Eagle Global Equity ETF FEGE N/A N/A 0.50% 0.79% 12/19/2024 First Eagle Global Fund - Class A SGENX 18.0% 21.2% 1.10% 1.10% 1/1/1979 iShares MSCI World ETF URTH 17.5% 24.0% 0.24% 0.24% 1/10/2012 iShares Dynamic Equity Active ETF BDYN 16.9% 21.5% 0.40% 0.42% 6/1/2017 Rayliant Quantitative Developed Market Equity ETF RAYD 23.2% 24.6% 0.80% 1.16% 12/15/2021 FIS Christian Stock Fund PRAY 6.1% 16.9% 0.69% 0.69% 2/7/2022 JPMorgan Global Select Equity ETF JGLO 10.4% N/A 0.47% 0.47% 9/13/2023 Tremblant Global ETF TOGA 27.5% N/A 0.69% 0.69% 4/30/2024 Source: LSEG
Net expense ratios (reflecting any current fee waivers) are shown, along with gross expense ratios from the funds' prospectuses. The total return figures are net of expenses and reflect reinvestment of any dividends and capital-gain distributions.
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