The S&P 500 posted a 2Q gain of +3.09% on the back of the 1Q’s +6.07%, a 1H total return of +9.34%. The five horsemen of tech (Alphabet, Amazon, Apple, Facebook, & Microsoft) contributed roughly a third of the 1H’s overall gain but were not the only winners. In the 2Q, the healthcare sector was up +15.1% as “Repeal & Replace” was repealed and replaced. Additionally, the pharma stocks rallied as Dr. Scott Gottlieb, the new FDA commissioner, promised to streamline the FDA drug approval process. Consumer discretionary names (think homebuilders) rallied +10.2%. Shale producers continued to pump, oil sank, and the energy sector retreated -13.8%.
Despite the Fed’s pulling in its QE horns (Quantitative Easing = easy money), other central banks, particularly the ECB and the Bank of Japan more than did their part by adding $200 billion a month to global liquidity. While our Fed has announced it will soon start to unwind (decrease) the unprecedented debt on its balance sheet, the jury is still out as to how this all ends. Our search for investment candidates with a “margin of error” causes us to look in many, many nooks and crannies.
Speaking of one of those nooks, for the second Q in a row, our big winner was one of our biotechs, up +43% in the 2Q on top of 1Q’s +75% gain. The company received FDA approval for BevyxXa, a treatment for deep vein thrombosis. The drug is designed for use in hospital and home settings, unlike competitors which may only be used in hospitals. This isn’t even the drug that has excited the investment community. That is the company’s other drug candidate, AndexXa, a reversal agent for blood thinners. Currently, there are no fast acting reversal agents for Eliquis or Xarelto. The firm is expected to receive the FDA decision for AndexXa in January next year.
Our drug company for cats and dogs saw its stock price weaken on the news of manufacturing difficulties at the plant intended to produce a third drug. We saw that as an opportunity to purchase; the stock was up +36% in the Q.
Our energy holdings are just holding on. In hindsight, we underappreciated the power of the shale producers to disrupt the pricing mechanism of the energy market (the price of oil). Seadrill, which owns the very best fleet of drill ships in the world, is undergoing a restructuring. The stock is down enough now that we choose to hold hoping/anticipating that common stock holders will be left enough equity to make it worthwhile investment from here out.
Gold Leaf is an independent Registered Investment Advisor that buys stocks/bonds in cash positive companies with sustainable competitive advantages. As an independent firm, Gold Leaf provides objective investment management. Our goal is to protect client assets on the downside while participating in most of the market’s upside.
July 1, 2017 Paul F. Rodgers, CFA
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