THERE IS AN OLD SAYING: "THE MARKET CLIMBS A wall of worry." Its performance over the last four years certainly underscores that point. During a time when many investors have carefully avoided stocks, both the Dow Jones industrial average and the Standard & Poor's 500 index have climbed to record territory. The pain of the financial crisis still lingers for many, but as the crisis becomes a distant memory and the market continues to reap strong gains, investor interest in public equities is starting to gain traction. Now the shifting debate centers on the sustainability of the bull market.
Clearly, equity valuations are not as compelling as the once-in-a-lifetime bargains that became available when the market bottomed on March 9, 2009, but I don't think this bull market will stumble any time soon. Dips and corrections may occur, but as I assess the current environment and look further into 2014, I remain positive on equities.
Let's say, however, that you're still nervous about the overall market and want a lower-risk way to tiptoe back in. Well, in a way, that is what my firm specializes in doing: We search for specific companies with strong fundamentals whose stocks are inexpensive--generally because they are under a cloud. Most of the time, the companies we find are one-offs--not connected to their sector as a whole--or members of specific industries in the market's doghouse. Rarely do we think an entire sector has fallen out of favor.
Having said that, we do think the broad healthcare sector is out of favor. Since the market bottomed, it has underperformed. Note, however, that healthcare companies often trade at a premium given their historically strong growth. So opportunities within the sector have led us to hold a higher percentage--more than 10%--of our portfolios in healthcare stocks.
We think that high quality, uniquely positioned healthcare companies offering essential products and services have several key things going for them. First, we expect healthcare demand to pick up, driven by a clear demographic trend--aging baby boomers--as well as an economic recovery. We think more people will seek elective surgeries and schedule...