Seeking a Cure for October Blues?

Written by GSCR Staff   
Wednesday, 08 October 2014 08:58

Have October blues got you down?  Worried about how you'll get through the next few months as temperatures fall and stock prices could go with them?  Are you looking for proven performance since this bull market began in 2009, with low price volatility and good liquidity?

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The Health Care sector has been outperforming all other sectors, including the S&P 500 for the last 12 months.  The health-care sector is less sensitive to the overall economic climate; so, it provides a defensive tilt for a portfolio.  In addition, the recent uncertainty over health-care reform seems to be settled for the immediate future. While the best performing industry within this sector has been biotechnology, that industry has also been among the most volatile with high risks of drawdowns and uncertain intrinsic valuations.

PowerShares Dynamic Pharmaceuticals Portfolio (NYSE-PJP- $62.58) offers the best of both worlds because it includes the biotechnology industry as part of the larger pharmaceutical industry.  It further has been among the most consistent and best performing exchange traded funds (ETFs) in this sector.

PJP uses a complex methodology to select and weight pharmaceutical companies based on fundamental and risk factors.  Per PowerShares, PJP tracks the Dynamic Pharmaceutical Intellidex Index which evaluates companies for inclusion based on "price momentum, earnings momentum, quality, management action, and value….  The fund and index are rebalanced and reconstituted quarterly in February, May, August, and November."

The total assets of the fund were $1.26 billion representing 30 holdings. The fund's expense ratio is 0.58% while dividend yield is 0.46%. The trading volume is roughly 275,613 shares per day.  PJP is not actively managed nor is it diversified.  Its multifactor selection process tilts the fund toward mid- and small-caps (40% combined).  By contrast, a market-cap weighted fund of this industry would be dominated by a handful of mega-caps like J&J, Pfizer and Merck. PJP also carries a heavy biotechnology component, including companies such as Celgene, Gilead and Amgen in its top ten holdings.

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Given its narrow sector focus, this ETF would work best as a satellite holding in a diversified portfolio.  We recommend buying PJP with a target price ranging from $73 to $79 within the next 12 months.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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