Daily Gains Letter

Healthcare Tops as 4Q14 Earnings Struggle

By for Daily Gains Letter |

Healthcare Sector the Only Area of Attractive Growth Among Bleak 4Q14 EarningsIt’s that time again; another quarter has come to an end. The fourth-quarter earnings season numbers will officially start flooding in for the S&P 500 on Monday, with Alcoa Inc. (NYSE/AA) the first to report. However, the stock market is currently in a funk, beginning 2015 with weakening oil prices and continued concerns over the global economy. The problem: as the stock market searches for a reason to buy, several segments are suffering from the selling pressure. There is, however, one segment expected to look up heading into 1Q15 and that’s the healthcare sector. But more on that potential investment opportunity in a moment…

4Q14 Earnings Season Looks Bleak

A major reason for the selling pressure that’s affecting several stock market segments has been the downward push on oil prices, which continue to search for a floor. West Texas Intermediate (WTI) oil was around $48.00 a barrel at close yesterday and Brent crude was just below $51.00. The oil weakness is a major drag on the market and offers an excuse to sell.

On the charts, the major stock indices, including the DOW, NASDAQ, S&P 500, and Russell 2000, are all below their respective 50-day moving averages (MA) and down more than four percent from their highs.

On Monday, Alcoa will start off the reporting. The company is considered a decent barometer on the global economy, but my expectations are low that we will be able to give reasons for investors to buy.

Earnings growth in the fourth quarter is estimated at a muted 2.6%, well below the 8.4% estimate as of September 30, according to a report from FactSet. (Source: “Earnings Insight,” FactSet web site, December 19, 2014.) The report indicates that all 10 S&P 500 sectors have seen their earnings growth cut, which doesn’t offer support for the record moves by the S&P 500 and DOW in December.

If you are looking for some hope, it doesn’t appear to be coming in the fourth quarter. So far, about 87 S&P 500 companies have issued negative earnings-per-share (EPS) guidance, while 21 have issued positive guidance. That means 81% are negative; the average is 67%, according to FactSet.

Furthermore, revenue growth continues to be sluggish at a projected 1.2% for the fourth quarter, down from 3.8% as of September 30.

What this means for investors is that there is continued cautious trading ahead, and investors need to be extra careful in the stock market. But that’s not to say there won’t be growth in any stocks; some segments are expected to be looking up.

Earnings Growth Expected in Healthcare Sector

While at the top of the earnings growth list is the telecom services segment, the sector that continues to drive earnings—and I expect will continue to do so in 2015—is the healthcare segment.

For the healthcare sector, earnings growth is estimated at a strong 16.8% in the fourth quarter, well above the third-quarter earnings growth. All areas of the healthcare segment are expected to show growth, too.

For investors interested in playing this positive trend, you would be wise to watch a healthcare-related exchange-traded fund (ETF) like the SPDR S&P Health Care Equipment ETF (NYSEArca/XHE).

Health care Equipment ETF

Chart courtesy of www.StockCharts.com

For more aggressive investors, the ETF to watch may be the PowerShares S&P SmallCap Health Care ETF (NASDAQ/PSCH).

PowerShares S&P SmallCap health Portfoloi

Chart courtesy of www.StockCharts.com

Either way, investors looking for a reason to buy may find the healthcare segment their best bet heading into 2015.

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