Sell in May and Go to Health Care: S&P Capital IQ

Moving from S&P 500 to sector holdings and back can bring greater returns

The investment chestnut “Sell in May and go away” was the basis for a webinar conducted on Wednesday by S&P Capital IQ, and its premise offered a glimpse into where one might choose to go in a market that offers both choice and challenge.

Sam Stovall of S&P Capital IQSam Stovall (left), S&P Capital IQ chief equity strategist, pointed out that while the S&P 500 offered slim returns from the period of May through October, averaging 1.2% as calculated from April 30, 1945, through April 24, 2012, during those same years it averaged a return of 6.9% for the months of November through April. Hence, leaving the S&P in May and returning in November does seem to have a basis in fact.

However, Stovall then turned to market sectors to identify where one might seek returns rather than parking investment money in cash for six months of the year. Focusing on consumer staples and health care, he pointed out that from April 30, 1990, through April 24, 2012, the former gained 4.7% and the latter 4.3%, compared with the average semiannual return of the S&P 500 for the same period of only 0.9%.

Investors engaging in a twice-yearly rotation in and out of the S&P 500 and individual sectors could, he said, boost returns substantially, calculated on price only. If an investor stayed in the S&P 500 all year during the period of 4/30/90–4/24/12, he could have had a hypothetical compound annual growth rate of 6.7%. If on the other hand in May the same investor moved into a portfolio of 50% consumer staples and 50% health care, moving back to 100% S&P in November, the return could have been 10.7%.

Todd Rosenbluth, S&P Capital IQ ETF analyst, then addressed ETFs, providing insight into how they are constructed and ranked. Ranking, he explained, was based on three factors: performance analytics, risk considerations and cost factors. This allows an ETF to be ranked not just on its holdings but also its characteristics relative to peers.

Jeffrey Loo, S&P Capital IQ health care equity analyst, addressed some of the issues before the health care industry that are expected to affect holdings. As a defensive sector with underperformance in the pharmaceutical area, the sector offers opportunities, said Loo, as well as some challenges.

Many of the challenges come from the pharmaceutical sector, hence the underperformance; that area is about to go off a “patent cliff,” with a substantial number of high-return products either just off patent or due to go off patent in 2012.

But if pharmaceuticals are ranked neutral, health care services and health care supplies are among the best returning subindustries in the sector. The former returned 16.7% year to date and the latter 20.1% year to date.

The fact that health care reform is before the Supreme Court offers some uncertainties, but there is also the potential for a positive outcome for the sector—particularly if the individual mandate is upheld. That could result in a rise in insurance coverage, as well as boosting facilities, services, equipment and managed care among the subindustries in the sector.

Should the law be overturned or the individual mandate thrown out, the effects would be neutral to negative. Loo added that it is doubtful that the worst-case scenario (invalidation of the individual mandate) has been priced in, but while some subindustries may suffer, he added that “health care lobbyists and lawyers have formulated strategies … and will press forward with litigation to overturn or rescind some of the new regulations that would be adverse to them.”

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