Are The Dog Days Over?
Every year at this time we start to wonder what will happen after Labor Day. It snuck up on us this time thanks to its first day of September arrival coupled with Olympic and political convention distractions. Nevertheless, the Labor Day weekend begins in just two days. The Wall Street crowd will descend on the Hamptons. Many people will take one last trip to the beach, the mountains, or their favorite weekend destination. Others will be content to stay at home and enjoy a backyard barbeque.
September marks a new beginning. In many ways, it is a beginning with more significance than January. January starts a new year, but nothing really changes except the calendar, and its implicit demarcation point for many annual activities (like income and tax reporting). If summer is the vacation season, then September is the beginning of the working year. Although kids in some parts of the U.S. start back to school in August, September is traditionally known as the beginning of the school year.
Europeans like to vacation in the month of August, making September their beginning too. For many companies, it is when they kick-off their planning cycle for the upcoming calendar year. We don’t need to remind football fans that it is also the beginning of a new season. Even the U.S. Government begins its fiscal year upon the completion of September.
For the stock market, it is a time when we expect to see volume increase. August consists of the “dog days” of summer and lackluster volume that places a layer of doubt on market action. With vacation season behind them, analysts will spend the next few weeks tweaking their year-end projections. Strategists will revise their forecasts, and traders will step up the volume.
September can set the tone for the remainder of the year. If Wall Street thinks the bear has done its work, then it could be a bullish month. However, the opposite is just as likely to occur.
September can set the tone, but it won’t have the final word. The November election will create uncertainty, which is something the market does not like. We also anticipate a vicious round of tax-related transactions in the fourth quarter. Stay tuned for an interesting final four months of the year.
The Fed also likes to mark the end of summer and a new beginning with their annual gathering in Jackson Hole, Wyoming. Ben Bernanke spoke at this event last week and did his best to calm investor fears. For now, he believes that inflation will be contained as a result of softening global demand and a strengthening U.S. dollar. The bond market seems to agree, with the yield on the 10-Year Treasury hovering near 3.8%.
The Energy sector had a nice bounce this week, recovering more than +8% from its recent low. The sector is finally performing better than crude oil, which remains highly volatile. Hurricane Gustav has the potential to keep things interesting if it heads toward the energy-alley region of the Gulf of Mexico. Energy and Materials have been highly correlated the past few years due to the influence of natural resource commodities. The duo is now a trio with Utilities joining in. Investors are treating Utilities as a commodity play, with power generation as the commodity. We expect the high correlation between Energy and Utilities to remain in place. The line between energy production and energy distribution will continue to blur as more alternative energy sources come online. Financials are back in last place as another round of selling hit the sector this past week.
The large dispersion in our style rankings has disappeared and a more “normal” spread between the best-performing and worst-performing style now exists. Small Cap equities still have the edge and continue to show positive intermediate-term momentum. Large Cap Value remains at the bottom of the list thanks to its large exposure to the Financial sector.
Our global rankings still look dreadful. We’ve been saying that the U.S. market is the best of a bad lot for weeks now. This morning on CNBC we heard it referred to as the “best house in a bad neighborhood.” Any way you want to describe it, the result is the same — the U.S. looks good on a relative basis and bad on an absolute basis. Canada improved its relative ranking this week as a result of gains in the energy sector. China also made a large jump after setting a new low last week.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“A perfect summer day is when the sun is shining, the breeze is blowing,
the birds are singing, and the lawn mower is broken”
James Dent (1928-1992) Columnist, The Charleston Gazette
Healthcare Pick with Potential: QSII
If you watch the market, you know about Healthcare. Of the ten broad sectors the S&P covers, it’s the only one with positive performance in the last three months. As the biotech tide rose, other Healthcare ships moved up in the harbor. Pharmaceuticals and medical services also began surfacing in the wake of positive biotech performance.
Healthcare Safe Haven
It seems investors finally remembered traditionally-safe investments during Bear Markets. With election uncertainty and remaining credit issues in the economy, investors are returning to what they know. Healthcare usually outperforms other sectors during such times, and that has held true in recent months. We expect the trend to continue.
There are a couple of ways to play the continued rise in Healthcare. You could stick with Biotech, but momentum appears to be settling in this area. Another option is to go with (pardon the expression) a surgical strike in the industry. You could look for a company that aims to capitalize on an attractive subsector in Healthcare. A company that not only could gain from aging boomers, but one that could grow based on the fundamentals of the industry.
We found such a company in Quality Systems Inc (QSII). A medical software company, QSII has two businesses. For one, they build electronic health records software, or EHR, for doctor’s offices. Second, they do the same thing for dentists. According to IBD, only 20% of U.S. doctors have switched to EHR. Since QSII is one of the leading providers of this technology with their NextGen product line, they stand to profit as the industry moves to electronic record keeping. Watching this transition is like seeing traditional print publications move to the web. QSII is in the right place at the right time.
What may seem like a boring little business is worth a second look. Keep in mind, they’re a high-margin software company in the medical space. The systems are already built. QSII now services and sells to a market in desperate need of the product. Moreover, regulators recently loosened restrictions on EHR subsidies. This could result in further deployment for QSII’s NextGen. From our vantage point, their biggest need is company direction. We think they recently achieved this when they hired a new CEO, Steven Plochocki, 56.
Drama = Opportunity
Two weeks ago, Quality Systems picked up Plochocki, in a bid to boost sales. However, this hire was not without drama. A proxy battle is raging that should be resolved by the annual shareholders meeting on September 4. If QSII can weather that storm, then pick up steam to close above $45, the sky’s the limit. Bottom line, the drama equals opportunity for you.
QSII fundamentals are attractive. A $200 million run rate, $64 million in cash, $0 debt, with dividends and earnings that continue to crush estimates, QSII is a great pick in Healthcare. Bear in mind, it’s a small cap stock implying volatility not suitable for every investor. Forget Pick of the Week. If you can handle the risk, then QSII could be our Pick of the Year.
All the best.
Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don’t risk money you can’t afford to lose. You will need to decide when (and if) it is time to sell.
If you received this newsletter from a friend, get your own subscription HERE.
Get this valuable resource delivered to your inbox every week at no charge.
You can cancel your subscription anytime.
© 2008 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.
Distribution is encouraged. Please do not alter content.