In the last year, the S&P 500 has fallen about 46 percent. During the same period, the TA-25 dropped almost as much. The standard definition of a bear market is a drop of at least 20 percent off a recent high. In case you had not noticed, during the past year, we have gotten ourselves into one very severe bear market.
And yet not many observers are willing to say we are at or even near the bottom. The contagion of the financial tsunami that has engulfed the US and Europe seems to be spreading. Places that had strong growth and seemed to be immune to the travails of the advanced industrial economies are suddenly facing harder times. Eastern Europe is one. Hungary has gone to the European Central Bank for help, while Ukraine has asked for help from the International Monetary Fund. Even the Persian Gulf, with its riches gushing from high oil prices, is suffering. The Wall Street Journal reported on Monday that Kuwait's central bank has had to bail out one of the country's largest banks, and has decided to guarantee all bank deposits. Saudi Arabia announced it would provide $2.3 billion in loans to low income borrowers. In Asia, China's economic growth has slowed to 9 percent. By any measure, that's heady growth rate, but it is down from the double-digit growth rates of recent years.
The hedge fund industry is among the wounded. Though it billed itself as able to perform well no matter what state the economy was in, the current turmoil has shown the fallacy of that claim. The Economist just reported that a firm which tracks hedge fund performance found these funds are down by nearly a fifth this year, the worst year since it starting tracking the industry in 1990. The magazine also says experts expect the amount of assets in the industry will fall as much as 30 to 40 percent as clients leave hedge funds.
Investors, not surprisingly, are seeking shelter in investments perceived as involving low risk. The British pound is at a six-year low relative to the dollar, while the euro is at a 2.5-year low. The recent rise in the US dollar as well as the Japanese yen is a function of investors bailing out of other currencies and seeking the security of the currencies of the world's two largest economies.
I don't know of any truly safe harbors in this financial storm. But there is advice that every student of investing has heard, namely to buy quality. This is good advice. If you invest in quality companies, when the storm passes and the skies clear, these are the companies which will be able to set sail and race out of the harbor ahead of those whose quality lags.
As always, I find quality by analyzing stocks using the Guru Strategies I follow. These are computerized analyses based on the investment strategies of many of the great investors. When faced with a storm like we are having, you want your ship captained by someone experienced and with a proven track record, like Warren Buffett, Peter Lynch, Benjamin Graham and others.
No company or industry is fully immune to the current economic turmoil, but companies addressing the healthcare industry seem to me likely to be less heavily affected than many others. I have found a couple of healthcare-related companies that earn accolades from my Guru Strategies. One of these is MWI Veterinary Supply (MWIV), which distributes pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment, supplies, veterinary pet food and other products to veterinarians in the US. Its markets include veterinarians who address the market for personal pets, as well as those who service farms, ranches and other animal producers. While animal care certainly can be affected by the current economy, it will not likely be as affected as many other industries.
More importantly, WMI gets high grades from the Guru Strategy I base on the writings of James P. O'Shaughnessy. The O'Shaughnessy value stock approach likes MWI's market cap of $373 million, which is more than twice the $150 million that the strategy sets as its minimum. Also in the company's favor is that earnings per share have increased in each of the past five years and its price-to-sales ratio is only 0.47 (way below the 1.5 maximum). The last variable considered is if the stock's relative strength (how well the stock has done during the past year compared with the rest of the market) places it among the top 50 of the stocks screened using the previous criteria. MWI is among these top 50 stocks, with a relative strength of 82 (its stock did better than 82 percent of the market's other stocks).
Another stock you should be aware of is Becton, Dickenson (BDX), which is US-based, though it gets about half its revenues from markets around the world. Becton is the world's largest manufacturer and distributor of medical surgical products, which include needles and syringes. It also manufactures diagnostic instruments, laboratory instruments, reagents and other products. The company describes itself on its website as a "global medical technology company."
It is reassuring that in tumultuous times, the Guru Strategy I base on Warren Buffett's approach to investing is very favorably impressed by Becton. Buffett is known as someone who has largely (though not entirely) sidestepped the traps that have tripped up others recently (like subprime mortgages and credit default swaps). Among Becton's attributes liked by the Buffett strategy are its dominant position in surgical products, earnings that increased in each of the past 10 years, annual earnings that exceed total debt and positive free cash flow. In addition, the strategy looks to the future and calculates what it thinks an investor can earn on an annual basis over the next 10 years when buying at today's price. In Becton's case, this comes to a perfectly acceptable 13 percent.
Neither of these companies is in the crosshairs of the financial crisis, unlike oil and financial companies, real estate related concerns and others. They address the healthcare needs of animals and people, and these are not as susceptible to market forces as are other products and services. Of course, getting passing marks from a Guru Strategy is required for me to write about a company, and both of these companies get such marks. Long term, MWI and Becton should perform well; when you buy them, you are buying quality.
Published by Globes [online], Israel business news - www.globes.co.il - on November 6, 2008