Consolidation in Medical Services Sector
When the going is good, it’s hard to imagine what event or series of events could lead to a change of the status quo. Investors have watched stocks rise for 13-months in a row, and the slow and steady gains of the last six weeks are giving us a sense of security that the wild, volatile swings and bear market are now a distant memory.
Believe me – nothing would please me more than a steady one or two percent gain for the market every month. I’m sure that you would agree that such performance would be great. Unfortunately, if history is any indication of what the future may hold, the market will not go up perpetually. Many investment professionals and analysts are now calling for a pull-back, and are hoping that a consolidation period will help maintain a sense of reality with respect to stock valuations.
I remain an optimistic person, and an opportunistic investor. There will be many opportunities for profit in the coming years, and together we’ll work to capture healthy gains. However, I think it’s important to be realistic about the market’s performance, to recognize that volatility in the stock market is likely to return, and that there remains a considerable risk for a sizable correction in stock prices. Let’s proceed with caution. That means averaging into new positions, and sticking with best-of-breed stocks.
Since small-cap stocks tend to be more volatile than large-caps, we shouldn’t be surprised to see ten and twenty percent price swings. If we are invested in good companies, these swings alone are not signs of faltering businesses. They are simply signs that the market is searching to converge on reasonable share price valuations. They can also be great times to initiate, or add to existing positions. I still believe we will see the Russell 2000 rise to the mid-700’s this summer.
***With that cautionary note, I’d like to move on to a few current developments that are going to dictate market direction in the coming days. This morning I was speaking with Trademaster technical analyst Jason Cimpl. We were discussing the upcoming earnings season, and how today could be a rough day for energy and metal related holdings. That’s because Alcoa (NYSE: AA) missed analyst estimates.
The aluminum fabricator missed for its first quarter last night and shares are down 2% in pre-market trading. Since Alcoa is the first major company to report quarterly results, investors will often pay close attention to its earnings. Additionally, Alcoa's aluminum products are sold to a variety of industries, mainly manufacturing. Thus, analysts will look at sales growth and guidance as a benchmark for overall economic health.
But Jason and I both agreed that while Alcoa is an important company to monitor for manufacturing health (which dictates commodity usage and economic growth) the company’s quarterly announcement is not the most important financial report to review this week. Technology and financial earnings reports will likely dictate market direction.
Today Intel (Nasdaq: INTC) reports financial results. The semiconductor manufacturer is slated to earn $0.38 on $9.85 billion in revenue this quarter. Jason believes the stock market rally will halt if Intel cannot deliver.
In addition to the semiconductor giant, Google (Nasdaq: GOOG) will also be reporting this week. Both companies are barometers for business spending and are monitored closely by anyone with a stake in the market. Small cap technology stocks will take direction from these two earnings announcements.
Finally, in addition to the twin tech giants, financial behemoths Bank of America (NYSE: BAC) and JPMorgan (NYSE: JPM) also report this week. The health of the financials is absolutely critical for the market to maintain its gains.
***The small cap development I’m watching today is in the technology sector. And more specifically, I’m looking at medical transcription companies. In the Small Cap Investor PRO portfolio I have a position in the third largest medical transcription services company in the U.S. But it’s still a small cap stock, with a market cap of just $183 million. This company has put in a bid to purchase the second largest, which is in bankruptcy. The duo would be formidable, and shares in my company are moving on the news.
Digitization of medial records is big business. And with federal incentives rolling out, electronic health records are becoming more commonplace across the country. Companies that provide efficiency solutions, like the transcription services company I own, are in the sweet spot to capitalize on the opportunity. It’s by no means a guarantee that they will succeed in a competitive environment, but the consolidation that looks to be starting suggests that there will be fewer, bigger players. In a growing industry, that means opportunity for investors.
