Healthcare and Discounted Private Equity

Healthcare and Discounted Private Equity

Trades in Soda and Whisky;

Last week, I touched on contrarian quality. To remind you, Quality stocks have resilient earnings and cash flow, in contrast to cyclical stocks (commodities and industry) that do not. We have no idea what an oil company’s profits will look like in the future, but for fast-moving consumer goods, utilities or pharmaceuticals, it’s a steady and predictable affair.

Steady profits mean these stocks behave like bonds, albeit that idea dilutes the faster the companies manage to grow. But high-quality businesses rarely grow quickly; at least, that was true until big tech came along. Yet even those stocks managed to correct quite significantly in 2022. Quality never did.

The surprise is how investors used quality stocks as safe havens in a bond bear market, regardless of the structural linkage. Given Quality never corrected, I believe it is a bad idea to buy these until they do. I was surprised to see that GMO, the authority on spotting bubbles, have just launched a Quality ETF (QLTY US), which I think they might regret before too long. What’s happening to the likes of Diageo (DGE) will spread across the group, which still offers poor value in a 5% risk-free world.

Diageo Is Still Expensive

Source: Bloomberg

What we are doing is identifying the second tier of quality stocks that have corrected and offer good value. I also believe they will help should the economy cool because their earnings are not economically sensitive. I know the recession remains elusive, but sooner or later, it is inevitable.

I am recommending another healthcare company and a private equity trust. I had considered Belgium’s Sofina (SOF Belgium), which is another family office. It is an excellent opportunity, but I concluded that with just €1 million of volume per day, it wasn’t liquid enough for the Soda Portfolio and not racy enough for the Venture Portfolio. Instead, I am recommending a London-listed diversified portfolio of private equity. When you are offered diversification at a discount – take it.

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