If I had a nickel for every time I heard someone say they like cheap stocks, I'd probably be writing this from my yacht today. And if I had a dime for every time lately I heard someone say that until things clear up, they were going to hide out in health care, I'd probably need a larger yacht to hold all my loot.
Fortunately, (or is it unfortunately?) I won't be collecting my 15-cents from Tobias Levkovich, Chief U.S Equity Strategist at Citigroup (C), anytime soon because he doesn't think health care is cheap OR a good hiding place.
"Some people say, 'hey the stocks look cheap' but actually the valuation criteria suggests...you sell them not buy them" he says, asking rhetorically 'should you have bought health care in the past when they looked cheap like this?'...and the answer is no, they've underperformed."
Further, "we are seeing earnings revision momentum slipping. We are seeing a valuation that is indicative of weakness," Levkovich says while pointing out that he currently rates the health care sector "underweight".
More precisely, Levkovich says both the equipment & services and the pharmaceuticals groups are challenged. But Biotech (^BTK) looks the least challenged within that underweighted sector but everywhere else I'd really pull back," he says.
So much for owning this year's top uncertainty hedge. Even when pressed on healthcare's defensive appeal and juicy dividend yields, Levkovich doesn't bend because "one of the big issues you've got to deal with is that the government spends about 50% of the health care budget in this country and government budgets are under massive pressure," he explains.
What that means, he says, is that there's going to be a fair amount of pricing pressure going forward in an industry that, perhaps more than any other, has been growing and outpacing inflation for a generation. Healthcare is now "going to face the reverse of that situation and it is going to be pretty painful for margins" he predicts.
Just look at the red hot Managed Care/HMO (^HMO) stocks that are up more than 40% year-to-date he says. These companies have not only been able to increase prices but "they have also been very, very tight on costs too." Add in the fact that the weak economy has caused people to defer medical treatments to avoid even paying the co-pays or the deductibles and you get what he calls "not a perfect storm but a perfect environment."
But alas, all good things, let alone perfect things, must come to an end and Levkovich says the HMOs are "looking like they're peaking and rolling over and you don't want to be there when that happens."
"I think people are going to care more about earnings sustainability" he says, unbending, like an arm in a cast.
Even when I say the "Big Pharma Pipeline Build" story makes page 1 of The Wall Street Journal this week, Levkovich's pulse stays flat.
"This is after the fact. The stocks have done really well and people are trying to find excuses for it."
What about you? Would you hide out in health care or head for the hills?
Comments are always welcomed below or via Twitter @MattNesto