Tuesday, October 1st, 2013

Smoke Signals

This blog is written in a hurry, following Unilever’s profit warning this morning, and is published instead of the rather worthy piece on the US fiscal cliff which we were planning.

For some weeks we have been highlighting the poor performance of the Consumer Staples group in the US and Europe. In both regions the sector was ranked fourth (out of ten) in May but had fallen to number eight by the end of September. In previous  blogs we suggested that high PE stocks (which include many stocks in the sector though not really Unilever) were vulnerable in a period of rising interest rates and elsewhere we argued that there was a link with the poor performance of emerging markets. In the end Unilever opted to blame poor like for like sales in emerging markets, but the currency situation (clearly impacted by the threat of the taper) has also worried investors.

We never claim to predict this sort of event; we merely observe which sectors are producing a return which justifies the risk of investing and which of them are not. When we see a large sector go from number 4 to number 8 without any apparent reason, it is a reasonable to believe that investors are worried about something which has not been announced, and which they may not be able to articulate. These worries are not often cured by consulting a consensus earnings estimate. One of the reasons we don’t like forecasts is that the process of forecasting requires analysts to spend too much time in broadcast mode, rather than listening (or dare we say it – analytical) mode.

So, is there a read-across? The answer is that there may be. Pan-European Healthcare has gone from number 1 in June, to number 6 at the end of September. In the US the sector is number 3, down from number 1 in May. So far we have not been able to find anything which justifies such a fall from grace in Europe, or which explains the difference between the two regions, which is odd given that all the major European groups have significant operations in the US. Normally we would not put this in a blog, but on a day like today, investors should be aware that there are also grounds for concern in the Healthcare sector.


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