Jason Ware, Partner & Chief Investment Officer at Albion Financial Group, talks about the growth prospects for the healthcare industry and highlights areas in the market that are undervalued. 

Opening Bell

J&J Stock Sinks After Revenue Misses and Full-year Outlook Was Cut, as Drug Sales Disappoint

investors also anticipating more earnings after the bell today. We've got big names like Hasbro Netflix, Lockheed martin, even IBM. So we might see some movement with those names in anticipation of what investors are expecting in their respective results for some more insight on early morning activity and on earnings. I am joined by Jason where partner and chief investment officer at Albion Financial Group. Jason, I was just talking about J and J obviously reported first quarter sales. Um, $23.4 billion. A slight miss on Wall Street expectations but growing about 5% there was a bit on the bottom line that was up around 3.1% E. P. S at $2.67. Then you got neck income that was down 17% and pharmaceutical sales up 6.3%. Just kind of a roller coaster. It seems like kind of a mixed bag of data and fundamentals. Therefore, the company, in addition to the company saying that it's going to stop, um, it's covid vaccine sales guidance addition to kind of halting the vaccine at the moment. What will your kind of overall takeaways of this report and what's your outlook on the overall health care industry? Good morning, Good to be with you. You know, I think the report was fine. Like you said there were some crosscurrents, it was, you know, some mixed results in there, but we're seeing that so far, largely across most companies earning so far. We saw it with the banks last week, a fair amount of mixed results. Something's good, something's bad and I think that's to be expected Given where we are in the cycle were clearly firmly mid cycle right now. And we're really lapping some tough year over year comparisons. I mean, last year we had north of 50% earnings growth for the full calendar year. So there is going to be an earnings headwind to growth this year. We do expect it to be directionally positive, but the growth rates are going to slow dramatically. We are seeing that. But again, I think when you add up the puts and takes on johnson and johnson's quarter, it was, it was decent. It was fine. It doesn't suggest to us that the economy is waning in any kind of way that has us concerned. Um, you know, they, they stopped giving guidance on their Covid vaccine. Doesn't surprise me that Covid vaccine never really took off. It was, you know, the third best vaccine, if you will in the marketplace. And then of course, there are still talking about some supply supply chains struggle. So, a little bit of a guide down doesn't have us too concerned. Do you think the theme continues its cross currents or kind of mixed bag? Uh, mixed fundamentals for a lot of these companies. I know you, we mentioned it, um, happened last week with the banks. Now we're seeing attention with J and J. But then we've got big names after the bell today. Names like netflix. IBM all reporting earnings later on the week, we'll have Tesla, even United Airlines, are you anticipating kind of a similar theme there or if not, you know, what are you gonna be watching? You know, it's a great question. You really have to go sector by sector and industry by industry and even company by company because you know, you, you talk about something like a netflix, you know, we don't own netflix and you know, largely this is still a secular growth company. But uh, to be sure netflix's growth is slowing. I mean we saw a big boom, they're in subscriptions when everyone was sitting at home on their couch during the pandemic and, and now that of course has changed post pandemic. So there are some, you know, specific things happening at companies that are going to be driven by uh, you know, operating fundamentals as opposed to just painting with a broad brush and saying everything's going to be mixed. I think we can paint with a broad brush and say everything By and large is going to be slower. Again, we lap were lapping a year last year, that was the best earnings growth year since 2010. So when you have that kind of boom and earnings growth naturally backside of, that's going to be a bit of slowing. But again, company specific Netflix vs Lockheed Martin? Lockheed martin versus IBM all very different businesses with idiosyncratic um, tailwinds and headwinds. Fair enough. But I think your theme in terms of tough comparables from, you know, a year ago or even a year and a half ago. It's also fair to say, I find this interesting cyclical trade right now. You think of financial, consumer, discretionary, discretionary, Those have lied compared to defensive stocks this year. And I find it interesting because, you know, december going into this year, almost every analyst that I talked to said, financials are going to be kind of the place to go this year, kind of with the interest rate environment that hasn't proven to be the case at least so far. What is this signal about investors sentiment about the market right now? You know, it doesn't signal much and and it's funny you bring that up because I was on your network at the end of last year talking about why banks weren't a good investment in the new year, give it despite the rise in interest rates. And we're starting to see that play out, um you know, I'm not always so prescient, but that was a good call. And the reason we're seeing that is because um, you know, banks were expensive at the end of last year, they did have a pretty big boost as the Feds started to turn more hawkish, that hawkish pivot in november money crowded into the financials under this idea that we're going to get all this net interest margin expansion, we're getting some of that, but it's not as aggressive as one might think because the curve is actually flattened. Meanwhile, we have all of these macro uncertainties, whether it's war in Ukraine, which of course nobody predicted including myself, we have inflation, we have um investment banking down, we have capital markets down, we have loan loss reserves that were a big boost to bank profits last year, that are now a headwind this year. So in all that against an expensive group. So again, you know, banks don't surprise me that they're coming in mixed and that the stocks aren't doing great because they were expensive and a lot of that was already kind of baked in the cake. Fair enough. And you were one of the few. They got it right because again, literally, almost everyone that I spoke to, they were saying financials are gonna be the play going into this year amid kind of the growth concerns that you were seeing another sectors and other companies in terms of growth kind of moving forward. What sectors are you looking at as indicators of either kind of easy in the supply chain or still rising and demand? Um you know, we, we like semiconductors. I know that's not a popular group right now. In fact, it's it's been under quite a bit of pressure, but, you know, we look at a company like applied materials within the semiconductors equipment group. You know, you talk about a business that has really strong demand tailwind, I mean that is a very tight market semiconductors are a secular growth theme, this is no longer a cyclical business. I think that's one thing that Wall Street is still getting wrong about chip stocks writ large is that these are cyclical. They were cyclical in the nineties, They were cyclical in the eighties. They were cyclical in the odds when, when, when the poultry was mostly computers and and you know, you know, feature phones. But we're in a different part of the semiconductor cycle. Now, this is a secular growth area with you know, internet of things and, and and you know, um, artificial intelligence and cloud and automobiles. I mean this growth in this demand is not going away over the next decade, but the supply is very tight. So a company like applied materials supplying the equipment to these new foundries that TSMC and Samsung intel etcetera are building is a great spot in our mind. And the stocks are, are fairly, you know, inexpensive relative to their history given the drawdowns that they're in. So we think that semiconductors is a space that long term investors can look to. And oh, by the way, to your second point, your second question, supply chain pressures are easing their and we think that will continue. When do you see that easing up in, in a more dramatic fashion to the extent that you you look at the tv space and they could benefit a little more broadly, Yeah, you know, tough to predict. Um, I think what we can say is that there are some, you know, indications that things are already easing. If you listen to the conference calls of a number of these chip companies, whether it isn't chip equipment or whether it's in chip design or whether it's in the manufacturers, we are seeing some of those bottlenecks ease. Um, you know, our best guess is that as we turn the page into 2023, the supply chain and semiconductors will look a lot better than it does today. I think one of the things that we're seeing in this kind of ties back into bank earnings is we saw a drop in auto loans because interest rates are going up and because demand is waning and the economy is normalizing. Well, as we see that demand for cars come down and that helps to alleviate some of that bottleneck and pull through. Going back to the secular story of all these chips and cars, I think those are the kind of things that can let the semiconductor industry catch up further and we think that will happen and unfold over the next 23 quarters before I have to let you go here gotta touch on oil and energy. Right, oil is snapping a four day rally as the EU looks to cut a band brushes energy even further. What's your outlook on the oil and gas industry? How long can this run last? Yeah. So I think we certainly had a premium. Um, and this is no secret in the oil market because of the war in Ukraine that has come off to some degree, although there's still some, you know, heightened nerves around that situation, understandably. So, so there still is a premium in the oil and gas market based on that geopolitical uncertainty depending on the direction and the magnitude of that conflict. I think that'll tell the tale for oil and energy over the near term. But as we remove that from the calculus, hopefully we can remove that sooner rather than later. When we look at the structural nature, they're just the equilibrium in the oil market. Um, you know, probably somewhere between 75 $90 a barrel is where we would take it because there's just been a lack of investment in the oil market for years. Um, that is finally kind of caught up and demand is not going anywhere anytime soon and certainly softening a bit. But supply is still trying to catch up and supply is not easy to turn on right now because we overproduced in the last decade and now there's just these companies are struggling for resources, whether it's human capital or physical capital, it's going to take time to correct. So we think north of 100 has that geopolitical premium south of 100 is probably, you know, fair value for now. Jason always appreciate your inside, Jason ware partner and chief investment officer at Albion Financial Group.