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Creative De-Construction of Health Care

On a regular and routine basis we evaluate positions held within client’s accounts. We call it “creative de-construction” of the portfolio as each position within the accounts should provide a combination of diversification, safety and growth.


Even though we have always done this, we are seeking to establish more structure and communication with clients along the way regarding our thought process and investment selection.

We are going through each sector starting with the larger ones; health care, technology and then industrials. As we evaluate the positions we will make adjustments as needed while keeping client’s capital gains and risk tolerance in mind.

Starting with health care:  The general approach in selecting investments within this sector is to seek companies that have multiple opportunities for growth. We seek to avoid single product-line companies, even though they may be very successful at times.  For example the pharmaceutical company Biogen shot up 27% the day after the FDA approved an Alzheimer drug.  However if that decision didn’t go their way it could have been down just as dramatically.

It was a very successful day for Biogen stock holders however we don’t hold it.  In fact, we seek to avoid any company that can have those type of disappointments along the way.  If you look back 1 year, prior to the FDAs decision Biogen was down 30% and even after the approval they are still down nearly 11% for the last 12 monthsThat isn’t a risk we are willing to take

The health care sector is a diversified sector all on its own including companies in services, drugs, precisions instruments, biotech, invasive and non-invasive devises, and medical supplies.  In general this sector can be insulated from economic downturns because the nature of some procedures are non-voluntary. 

Technology and aging baby-boomers will help prop up this sector going forward. Advances in technology will continue to provide new opportunities and aging baby-boomers will continue to create demand for products created.

As stated before, we focus on companies that have multiple product lines. Multiple product lines allow a company to create synergies across their products and have multiple touch points with their customer. 

We are also looking for companies that have strong balance sheets, cash flow and lower debt levels.  Strong financials and lower debt levels will help the company should we encounter a difficult market and if an opportunity presents itself to acquire a smaller company that can be a suitable “add-on” to their current product offerings.

In this round of “creative de-construction” we have decided to reduce or eliminate 3 companies:  Perkin Elmer, Pfizer, and Waters. Keep in mind, every account is slightly different as we took each clients’ over all exposure to health care into account when making decisions.

PerkinElmer and Waters are precision instruments companies; both are smaller and more volatile than we prefer at this point. Waters has had a good year but can experience sharp declines. PerkinElmer is being eliminated because they have some overlap with other companies we hold and feel more strongly about.

At this point, we also don’t have the degree of confidence in these companies that we want to have.

Replacing Pfizer with Merck –
Even though Pfizer is a strong company, we haven’t seen much growth and we don’t see much to get excited about with them.  Pfizer is paying out 72% of their earning for their dividend which means they are not reinvesting in future growth. Compared to Merck paying out 44%.  Merck has a variety of products and also has the “blockbuster” cancer drug Keytruda.

Periodically you should expect to see this type of communication from us as we continue through the sectors. Once completed, we plan to go back through them again, and again. As we go through each sector we identify companies that we want to invest more, hold, avoid, and those that could be future additions (if they reach our standards for investment).

We want to be the absolute best we can be, and it’s through feedback that we accomplish this. If you have questions or if there is anything we can help you with, please don’t hesitate to let us know.

Thank you for your time
Samara



Legal Information and Disclosures
This memorandum expresses the views of the authors as of the date indicated and such views are subject to change without notice.  Samara has no duty or obligation to update the information contained herein.  Further, Samara makes no representation, and it should not be assumed, that past investment performance is an indication of future results.  Moreover, wherever there is the potential for profit there is also the possibility of loss.
This memorandum is being made available for educational purposes only and should not be used for any other purpose.  The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.  Samara Capital (“Samara”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Samara.