DTM - Growth Posted An Impressive First Half But Is Still Playing Catch-Up

2023-07-21 16:06:25 ET

Summary

• The Nasdaq has provided tremendous performance so far in the first half of 2023.
• However, it might not be as impressive as it is mostly recovering from a much weaker 2022 performance.
• Some utility and healthcare names could be interesting places to put capital to work as they've been weaker performers for 2023.

Written by Nick Ackerman.

The Nasdaq Composite certainly got off to a strong start in the first half of this year. More recently, we noted that there had been broader market participation, but the Nasdaq still blew away first-half performance. Even the S&P 500, with its growing weighting of tech names, has put up some fantastic results.

Tech, and specifically anything touching "AI" has been rewarded. NVIDIA ( NVDA ) has been a primary beneficiary, but even our watchlist name, Broadcom ( AVGO ), has been surging too. Another beneficiary has been Palantir Technologies ( PLTR ) as well.

While it's certainly encouraging for investors holding many of these growth names, it might not tell us the whole story. Zooming out and looking at longer-term results from the start of 2022, we see that the Nasdaq Composite continues to lag. From this snapshot period in time, we see that the lead instead is the more value-oriented Dow Jones Industrial Average. Invesco S&P 500 Equal Weight ETF ( RSP ) has lagged the S&P 500 Index during this period by only a touch.

Another point for consideration is that the Nasdaq hit its low right at the end of December/beginning of January. The other indexes made their lows in October. They had already started to recover several months prior before the Nasdaq finally bottomed out, right in time to rip higher for 2023.

Perhaps more interesting is that in the last three years now, value and the equal-weighted RSP have outperformed growth by quite a significant amount too.

Of course, we are looking at all past performances, but I believe it helps put some things into context when we look at certain periods of time. While the Nasdaq and growth seem like they are on fire this year, they are more like just catching back up from what they've lost previously.

I'm an income and dividend growth investor who also happens to write options in order to play those themes to generate further 'income.' However, I still understand that growth has a place in some investors' portfolios. I hold a position in PLTR that we've been able to generate options income from thanks to Stanford Chemist sharing his ideas.

Admittedly, growth investments are a very small part of my portfolio, with PLTR one of my only non-dividend payers. That is unless you start looking at the dividend growth names that sort of straddle the value and growth lines - such as Microsoft ( MSFT ) and Texas Instruments ( TXN ). So my point isn't to bash growth investments but help highlight some interesting charts and data of what's going on more broadly. Overall, I believe that RSP represents a better picture of what the overall 'market' is doing.

Going Forward

Going forward in the second half of the year, I believe that utilities and healthcare names are interesting. This is because they've performed fairly poorly in the first half. Energy also has been a laggard, but that was after coming off of some pretty hot performances in the last couple of years. It's actually the strongest-performing sector in the last three years now. Although, I'm sure there are some great values if one is picking through the sector.

Utilities have to grapple with higher interest rates, which makes their yields a bit less appealing. If we are near the peak of the interest rate hiking cycle and only get the two more hikes expected before seeing rates cut, utilities could make a second-half recovery in anticipation of that playing out. Higher rates also make their debt more expensive, and debt is generally the go-to tool for utility projects. That could have been adding more pressure to the sector as well.

I covered WEC Energy Group ( WEC ) recently, and I believe that it still represents an attractive place to put money to work.

DTE Energy ( DTE ) is another Core Portfolio name that looks fairly attractive here, trading toward the bottom of its fair value estimate range. The dip in earnings we see in the graph came from the spin-off of DT Midstream ( DTM ) in 2021.

For healthcare, that seems to be dragged down by significant moves lower from Pfizer ( PFE ) and AbbVie ( ABBV ). PFE is dealing with the headaches of post-Covid sales and earnings boost. They are also looking to acquire Seagen ( SGEN ), which would be a large deal for them to close. ABBV is dealing with Humira's patent cliff.

Here are the sector's top ten holdings as represented in the Healthcare ETF ( XLV ).

Here is the top ten performance on a YTD basis. Only Eli Lilly ( LLY ) and Merck ( MRK ) have provided positive YTD results.

PFE, ABBV and MRK are all personal holdings of mine. PFE looks particularly interesting, and that's why I've covered it most recently as a place to put cash to work. I believe they'll be able to navigate well going forward and represent an attractive valuation at the moment.

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