Precious Metals, Health Care Led Mutual Funds In Feb.


Mutual fund investors will breathe a sigh of relief when they open their February statements to see that they recouped all of their losses from January plus some.

They can rest assured that the U.S. stock market is widely expected to continue chugging higher, thanks to strong economic growth and a massive flight from higher-risk emerging markets, although it's richly valued.

The average diversified U.S. stock mutual fund gained 4.49% and world equity funds rose 4.87% in February, according to Lipper Inc. Emerging market funds climbed 3.67%. Latin America, last year's worst-performing region, rallied 1.90%.

The S&P 500 closed at a record high after rebounding from a 4% sell-off in January. It ended the month ahead 4.3% at 1,859.

Nearly all companies in the S&P 500 index have reported fourth-quarter results. Seven in 10 surpassed analysts' earnings estimates and nearly two-thirds have beaten sales forecasts, according to FactSet. They, on average, grew earnings 8.5% year over year.

Financials and basic materials have posted the highest earnings growth rates, while the energy sector saw the smallest earnings improvement. So far 84 companies have released negative earnings guidance for the first quarter while 17 announced a positive outlook.

The S&P 500's price/earnings ratio is trading near its historical mean, with a 12-month forward price-to-earnings ratio of about 15. But the market trades at significantly high valuations when measured by the Shiller cyclically adjusted P-E ratio. CAPE compares price relative to 10-year moving average earnings when adjusted for inflation.

The market trades at 25 times 10-year trend earnings and 34 times trailing 10-year earnings, wrote James Montier of GMO in a white paper released Feb. 25. Investment management firm GMO has $112 billion in client assets.

Money flows and investor sentiment suggest stock prices will continue rising, according to TrimTabs Investment Research. "The TrimTabs Demand Index, which uses analysis of 21 flow and sentiment variables for intermediate-term market timing, hit an eleven-month high of 96.2 on February 26 (readings above 50 are bullish)," David Santschi, CEO of TrimTabs, wrote in a client note Feb. 28.

U.S. equity ETFs have posted inflows for three consecutive weeks totaling $19.2 billion, or 2.0% of assets. In addition, retail investors are turning more positive on U.S. stocks. U.S. equity mutual funds took in $8.2 billion in February, putting that month's inflow on track to be the highest since at least July 2013.

What's more, corporations are heavily buying back shares to reduce their float, thereby increasing earnings per share.

"New stock buybacks averaged a robust $2.8 billion daily in earnings season," Santschi wrote. "Announced corporate buying (new cash takeovers plus new stock buybacks) exceeded new offerings in each of the past 12 months, and the difference between them amounted to a hefty $49.2 billion in February."

Precious Metals Funds Aglow

Last year's worst-performing sector, precious metals funds, outshined all sector funds for a second month straight, rallying 11% in February. That pared losses over the past 12 months to 26%. Gold prices climbed 7% to $1,321 an ounce -- near a four-month high.

Gold prices peaked in September 2011 around $1,900 an ounce and have been dull ever since. Over the past 2-1/2 years, they've experienced several countertrend rallies of 10% before rolling over. That's likely to happen again, as gold prices are seasonally weak between March and June, analysts say.

"We are cautious in the short term and are wary of a sharp pullback in metals prices, but expect in the third and fourth quarter precious metal prices should continue to recover," Tom Winmill, manager of Midas and Midas Perpetual Portfolio , said in an email. "Historically, that has been a favorable period for gold and silver prices as demand from jewelry manufacturers increases ahead of the holiday seasons, starting with Diwali (a holiday in India) in October."

His two funds, with $31 million in assets combined, have climbed 13% and 3% respectively year to date.

Gold mining stocks are due for a rebound because they're severely oversold and undervalued relative to gold bullion, says Frank Holmes, CEO and chief investment officer of U.S. Global Investors, specializing in commodities.

After tumbling for three years straight from 2011 to 2013, they're unlikely to sink four years in a row. Consumer demand for jewelry, bars and coins rose 21% in 2013 as consumers took advantage of falling prices, according to the World Gold Council.

Holdings in gold ETFs rose 4.5 tons in February, marking their first monthly inflow in 14 months, according to Barclays.

Case Against Gold

Physical demand has weakened as gold trades near $1,300 an ounce, Walter de Wet, a commodities strategist at Standard Bank, observed. He believes gold will struggle as yields on benchmark 10-year notes, currently near 2.6%, rise to his target of 3.75% by year's end.

His rationale is that an improving U.S. economy and the Federal Reserve scaling back stimulus will spur demand for stocks, bonds and real estate, while diminishing gold's appeal as a store of value or safe-haven asset.

Parabolic gains in biotechnology stocks led health care funds up 6.42%.Intercept Pharmaceuticals ( ICPT ) blasted more than 500% in two days following positive late-stage study results of its drug obeticholic acid, or OCA, to treat primary biliary cirrhosis.

The New York-based company went public in 2012. Although it's valued at $7.9 billion, it has no products on the market and has yet to turn a profit.

Bank of America Merrill Lynch analysts estimate the drug has a potential market of 30,000 patients. Annual treatment costs range from $50,000 to $80,000 per patient, amounting to about $800 million in potential peak sales.

InterMune ( ITMN ), a lung and fibrotic diseases treatment developer, blasted 152% in February upon announcing successful late-stage study results on its only drug, Esbriet. The Food and Drug Administration has granted the treatment for a rare and fatal lung disease called idiopathic pulmonary fibrosis, an orphan-drug designation, offering it a seven-year exclusivity period if it's approved in the U.S.

As the only marketed treatment for IPF in Europe and Japan, Esbriet could become a blockbuster should it be marketed globally, say Morningstar analysts.

Forest Laboratories ( FRX ) shot up 51% for the month after agreeing to be acquired byActivis ( ACT ) for $25.5 billion in cash and stock.

The ObamaCare health care law has cramped the drug industry's profits, but it's benefiting from a significant increase in demand as 27 million uninsured people will receive coverage in 2014, wrote Herman Saftlas, an analyst at S&P Capital IQ, in a note Feb. 22.

"Despite near-term effects from patent expirations and regulatory pressures on drug pricing, we still think long-term prospects for the industry remain favorable," Saftlas wrote. "Pharmaceuticals remains one of the widest-margin U.S. industries, with prospects enhanced by demographic growth in the elderly (which account for about 33% of industry sales) and new discoveries in genomics and biotechnology."

Tech And Telecom

Russell Croft, vice president of Croft Investment Management, with $900 million in assets under management, says he's focusing on information technology and telecom stocks. He believes they'll benefit from corporations upgrading their software and hardware to boost productivity.

Global IT spending is projected to rise 3.1% this year to $3.8 trillion after growing merely 0.4% last year, according to Gartner.

Croft's top investment picks areeBay ( EBAY ), the ubiquitous online retailer;CDW (CDW), an IT products distributor;American Tower (AMT), a real estate investment trust that owns, operates and develops wireless and broadcast communications real estate; andXerox (XRX), a business process outsourcing provider in addition to maker of copier machines.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Mutual Funds

Referenced Stocks: ICPT , ITMN , FRX , ACT , EBAY

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