Keep an eye on the medtech and alternative energy sectors

Last year was tough for most investors. Almost every sector suffered except energy, with defense contractors and pharmaceutical companies being other examples of outliers.

Fortunately, the first few weeks of 2023 are looking up, in part because of some encouraging data showing that inflation and wage growth are starting to slow. However, as earnings season continues to wind down and corporate layoffs mount, questions are growing about the strength of the U.S. economy.

In addition, stocks could come under more pressure in the near term as policymakers aim to keep interest rates “high for an extended period.” At some point, however, the focus will shift to the future.

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Indeed, while much of the above paints a bleak picture, the outlook for certain sectors is more favorable. This includes medical technology and alternative energy, which are being boosted by some favorable factors.

By contrast, an industry that has traditionally held up during challenging economic times — consumer staples — could struggle in the coming years. Let’s take a closer look.

During the pandemic, a ton of technology took off.

Medical technology is not one of them, with hospitals suspending many elective procedures and surgeries related to non-life-threatening illnesses. This creates a lot of pent-up demand today.

In addition, many companies in the field could soon benefit from new products that help treat diseases that afflict millions, including diabetes, sleep apnea and heart rhythm disorders. It’s also worth noting that higher interest rates have less of an impact on medtech. Unlike other industries that have borrowed heavily to chase growth, medtech typically isn’t highly leveraged.

Names worth considering include Insulet (podcast), whose main product is a wearable pod that allows diabetics to forego daily insulin shots. It recently cited strong demand for the latest version of the product.

Dekang (DXCM) is another company addressing the needs of diabetics with glucose monitoring devices. Its latest model, slated to launch in February, is 60 percent smaller than previous versions and warms up 75 percent faster.

Meanwhile, a subsidiary of Inspire Medical Systems (INSP), Inspire Sleep, the potentially game-changing sleep apnea treatment. It’s a small device that doctors place inside a patient’s body, in stark contrast to the way medical professionals have dealt with the problem until recently: with bulky, awkward and obtrusive CPAP devices.

Whether the Reduce Inflation Act will reduce costs is a matter of debate. But there is no doubt that this is the latest example of governments around the world providing substantial policy support to green technology companies focused on producing alternative energy sources.

The Treasury Department is still finalizing the details of who gets what. We’ll likely learn more sometime in the first quarter. But make no mistake, some companies that have shown amazing resilience during the recent downturn will have a ton of new capital at their disposal to further improve their fortunes.

One that does this well is Array (Ali), a utility-scale producer of solar panels. Also of note is SolarEdge (sustainable development goals), which is more focused on the residential market in Europe.

Many investors flocked to defensive, yield-generating consumer staples last year.For the most part, the strategy has paid off with the Vanguard Consumer Staples ETF Handily outperformed the broader market index over the past 12 months, while offering a roughly 2.4% dividend.

However, valuations for many of these stocks have become stretched in recent months.In fact, consumer staples are as expensive as ever S&P 500 Index.

Therefore, anyone investing in growth (vs. dividends) should reconsider their defensive holdings. In fact, Johnson & Johnson (Johnson & Johnson) – which makes many consumer staples, although technically a healthcare stock – Procter & Gamble (PG) and Kimberly (KMB) Have The valuation ceiling may be hit.

The index is expected to give back some of the gains made earlier this year in the coming weeks and could test 2022 lows. In general, though, we don’t see a Warren Buffett-style buying opportunity on the horizon.That’s because the market sentiment is already bearish and the positions are light, it should be Limit overall downside.

That said, there is still potential for some sectors to generate outsized returns once the challenges associated with higher interest rates and challenging economic conditions start to fade.

– By Andrew Graham, Founder and Managing Partner, Jackson Square Capital