There are two undeniable truths: regional banks are underperforming the market in 2014 and health care costs are going up. The two factors might seem unrelated, but both play into Peter Kenny’s sector picks for the fall.
“Like health care,” said Kenny, CEO of Clearpool Group. But more specifically than that, he likes pharma. The NYSE Arca Pharmaceutical index (^DRG) is up more than 15% so far this year, but that doesn’t mean there’s not more growth coming.
“Pharma has definitely been one of the real leaders of the market this year, and I still think that pharma’s got an awful lot of room to run,” he said.
While most investors are eyeing continued M&A in the pharmaceutical sector, particularly as it relates to tax-inversion led deals, Kenny has a different reason for investing. “R&D, the health care sector, aging population. This is an area that’s got sort of cyclical growth that’s going to continue to outperform the overall market.”
By 2030, there will be some 72.1 million Americans over the age of 65. That’s double the number in 2000. Pharma companies are busy creating drugs to improve health conditions for that population, leading to increased revenue.
“There’s enough dynamic growth in the pharma space in R&D, particularly with the backdrop of that aging demographic that’s gonna help the space,” said Kenny.
Pharma isn’t the only sector Kenny is watching. “Love regional banks,” he said.
That’s a bold statement given the year regional banks are having – down 5% year to date and 10% from their 52-week high. Still, Kenny is bullish.
“I like them for a couple reason. . There’s no geopolitical risk directly tied to the sector. Interest rates rates will be rising next year, we know that, there’s certainty about that, and that will be very, very helpful to them. And there’s real value there considering that the economy is improving. Employment is improving [as well] – hours worked, earnings per hour. There’s lots improving, not the least of which is housing. So all of that should play very, very nicely.”
In fact, Kenny thinks regional banks are better positioned to take advantage of rate hikes than the bigger Wall Street banks.
“They’re much more nimble, they’re closer to the consumer, and there’s a real relationship dynamic there that I think is, it’s sticky and it’s going to pay off very, very handsomely next year,” he said.