Patrick Healey On Why A Mini-Correction Would Be Healthy

okay everybody on hello and welcome to
investing with IBD for November 26 2019 I’m your host Irusha Peiris and with me
today is Patrick Healey he’s a 20 year veteran of the financial
services industry and the founder of Calibre Financial Partners
thanks for being here Patrick yeah my pleasure on today’s podcast we will talk
about the current markets avoiding emotional decisions and we will go over
a few current ideas but let’s first start off with the current market we are
in an uptrend for distribution days on the sp500 3 on the Nasdaq the indices
continue to hit new highs and more stocks are breaking out too so the
environment continues to be strong Patrick what are your thoughts about
this market so I’m certainly excited and happy to see the market trading the way
it is but I will say without just sort of some many Corrections along the way
it is something that is a bit concerning I will say a lot of the market dynamics
are favorable right now we just received our third interest rate cut so the
Federal Reserve is indicated that we’re kind of in a steady state I think that’s
actually what’s fueling the market and certainly some expectations around a
trade deal with China that being said I think to have a little bit of a pause or
even some many Corrections along the way would be healthy for the stock market
what in the absence of that what you get is more of a boom bust cycle and that
could be troubling as we get into the end of the year there are some technical
factors with lost selling so on and so forth
and so I am excited about how the markets performing but also trying to be
cautiously optimistic yeah now last year we had that 20% correction
for a little while so now would you expect a little bit of a pullback when
you talk about mini correction like a 5% 10% or something like that wouldn’t make
you a little bit that would make you a little bit more
optimistic then or anywhere anywhere from a three to five percent I think
would be healthy for the market I think 20 is certainly exaggerated and I think
why we saw that last year was a lot was much more so fed driven and I don’t
think we’re going to see that going into the end of 2019 know that that that
would be bad if we have that so Patrick how did you get started in the industry
you know what was the path that you took to end up where you are right now sure
so I graduated college in 1996 worked for two investment banks out of college
Donaldson Lufkin Jenrette for three years then ultimately Lehman Brothers
for close to eight years I left Lehman in 2007 coincidentally I ended up being
about 15 months before they filed it was perfect timing well lucky I think not
something that I was anticipating but it was a difficult time in the job market
as you might imagine with the financial crisis I have my securities licenses and
wanted to to try out as an advisor I had gone to NYU for my MBA while working at
Lehman majored in finance and entrepreneurship and really wasn’t able
to utilize that skillset in a big firm environment like Lehman so what I do now
is much more entrepreneurial I get to work with individual clients really see
firsthand the impact that you have on them and it’s something I really enjoy
so I have been a financial advisor for a little over 11 years and I’ve owned my
own firm for just over six years now when working with clients
now obviously I’m assuming the biggest challenge is handling the clients
emotions when you go through some of these downturns or where the markets get
really volatile and they’re giving back some of the gains in their portfolio how
do you handle that how do you approach that so one of the things that I think a
lot of advisors under appreciate or underestimate is how much psychology is
involved in working with individual clients and working in the financial
markets and that’s something I spend an awful lot of time on I do pick
individual securities for clients in the accounts that I’m at
and discretionary authority and so it allows me to really intimately know each
position that I’m buying for clients portfolio I do my own research I do
extensive amount of research and so when there is a period of volatility or there
might be a sell-off in a particular sector or name I can really handhold
that nervous client through that environment remind them why we invested
in the position in the first place and really that’s where I earned my
compensation is helping people avoid emotional mistakes and when you’re going
through the the equity research process you know what are the things that really
stick out to them that makes a great stock a lot of it has to do with the
sector or the the strategy that we’re trying to tap into obviously for growth
names they’re not going to have the same earnings figures that more stabilized or
value name would have and so you’re looking at other types of factors if
it’s in a healthcare biotech sector for example you’re looking at drug trials
you’re looking at institutional ownership you want to make sure that
they have a large enough cash position to allow them to go through the research
and development cycle if it’s a more value oriented name you’re looking for a
healthy dividend and good dividend coverage ratio you want them to be in a
sector that is not at risk of being disrupted by new technology and so those
are some of the things that I consider and what about a market environment that
plays a huge part in all these stocks you know how do you get engaged on that
well where we are in the cycle or potentially are in the cycle yeah that’s
a really good question so some of it depending on where we are in the cycle
and I think we’re we’re sort of in the late innings even though the the
economic statistics are quite favorable a lot of times when there is sort of a
market disrupting event or Black Swan event
god forbid yeah you don’t see that coming necessarily so you’re kind of
trying to be proactive not knowing when that’s going to happen but trying to
guard against that as markets continue to trade up and
valuations get pressed as I said I think we’re in a late late innings of the
cycle it doesn’t mean it can’t continue for a while but I think we try and get a
bit more defensive we’re holding larger cash positions than
we would otherwise we’re positioning in some more defensive names and and you
know the growth names may continue to grow and I certainly hope they do but
again without those many Corrections along the way at some point we’re going
to be back in a recession it’s inevitable I don’t know what it’s going
to trigger that but we want to be prepared for that and not reacting to it
when we’re already in the middle of it yeah and also talking about cycles it
there there’s a cycle to the client too right
realizing where they are in the cycle and and the strategies change depending
on where where they’re actually at at that point absolutely when a client’s
and accumulation mode because they’re in their working years and perhaps their
you know their earnings power is at its peak those are easier times for me to
manage through yeah but when a client approaches retirement or is in
retirement and they need to draw down on those assets
I can’t position them in high growth names per se because they may need to
tap into those assets before the investment thesis can play out and and
they may have be forced to sell out of a position before it’s fully matured and
perhaps at a loss and so that’s something I have to avoid for clients
that are retirees or those that are drawing down on assets currently or even
generating income from those assets – do you use these like a covered call
strategy things like that – I do use options trading for certain clients I do
sell some covered calls to generate some additional income and I think that’s a
pretty good strategy to take advantage of where we are in the cycle right
valuations are pressed if you can generate some additional cash by selling
some call options on held positions that’s a good strategy
I do use options trading more of as a risk measure as well buying some put
protection I can’t get into sophisticated strategies for clients
just because I’m precluded from doing so by FINRA
standards but to the extent that I could use covered calls or maybe some
protective foots that’s a strategy I’ll employ for clients and if people are
interested in learning more about these do you have any are there some good
places to go and learn about some of these income generating events or
strategies yeah so there’s a number of online publications or sites that cater
to the retail investor community and I’ve used investopedia before I’ve
contributed to that site Keplinger is another good one and there really are
quite a number I’m a quick Google search will get you a pretty extensive list
perfect so the indices continue to make new highs and more stocks continue to
participate in this rally let’s take a quick break but when we return we are
gonna talk about psychology and how its best or why it’s best to avoid emotional
decisions when it comes to investment decisions stay tuned hey Irusha here
with a big announcement we have launched a brand new interactive video broadcast
called IBD live I believe life takes you behind
the curtain to see how professionals trade log on and watch live as IB DS
analysts and portfolio managers follow the first hour of market action and pick
winning stocks you get to listen to our conversations see our screens and ask us
questions all in real time if you’ve ever wanted to trade alongside a team of
experts this is your chance go to and sign
up to get your first two weeks for free Patrick Healey our guest on investing
with IBD okay Patrick let’s get into psychology and more specifically
avoiding emotional decisions it’s it’s amazing once you put real money on the
line in the market it gets very very emotional it certainly does and there’s
the risk for an inexperienced investor or someone that caters to their emotions
to chase stocks when they start trading up again for fear of missing out FOMO is
a pretty powerful motivating factor and then the opposite is maybe perhaps even
more powerful the fear of losing everything is when the sky seems to be
falling get me out of the market put me on the sidelines I can’t stomach any
more volatility and then inevitably they miss out on a recovery and so those are
two very powerful diverging emotions that I spend a lot of time helping
clients avoid and and so what what are some of those those strategies or how do
you overcome those because especially the clients I mean like a 2008 I can’t I
can only imagine trying to talk talk to two people at that point when when they
got caught in and lost like 50 percent of their portfolio yeah it’s it’s it’s a
difficult experience to have to go through especially when many people work
their entire lives especially for older folks and lesson learned perhaps they
need to be a bit more defensive as they approach that later in life in
retirement yeah but but certainly to have worked for 20-30 years and to see a
large percentage of your nest egg literally wiped out and what felt like a
month or less but what do you do at that point right the damage is done do you
park your money and miss out on what ultimately will be recovery and some
people did and I know they’re kicking themselves now and now they’re thinking
about hey do I get back into the market I don’t want to miss out on this bull
market they really should be taking a much more cautious approach because the
time to be holding firm was sort of down at the bottom of the cycle
in Oh 809 you know obviously hindsight is 20/20 but again if you’re an
inexperienced investor and you’re emotional and you don’t think that you
can maintain a cooler head or have an objective investment thesis as to why
you bought a position or positions then perhaps you should put your faith and
somebody that does have the experience and that is making decisions based off
of sound methodology as opposed to emotional and so let’s go over an
example of why – to buy stock so you have a stock and ends like okay here’s
how objective here so XYZ stock you know what what what type of objectives do do
you look for on this and to come up with that game plan really to go forward yeah
so I certainly will look at a lot of the financial ratios that a particular
company is showing right what is their their p/e ratio not just trailing but
really forward-looking what’s their PE growth ratio that’s indicative of a
growth aim and and the likelihood that they will be able to achieve a higher
share price going forward I look at free cash flow that is the health and a
wellness of a company and the ability to generate cash allows a company to fuel
future growth but also it helps hide some mistakes so when you’re operating
really thin and you don’t have the liquidity or cash profile one you have
to make some difficult decisions as a growth stock or company but also if you
make some mistakes managerial or competition wise those are going to be
highlighted when your cash Draft and so that’s that’s definitely an important
consideration one of the other things that I believe I touch upon earlier is
what kind of institutional ownership do these companies have and that can easily
be gauged by coming through 13f filings which institutional investors have to
publish 45 days after the quarter end look at some of the expert investors
where are they taking some of the bigger positions
name’s because a lot of times they have board representation they spend a lot of
time doing extensive research and if they’re gonna take a large position in a
company it’s because they think it’s gonna go out and so you can kind of
piggyback off of that strategy a little bit and put your money with smart smart
investors yeah especially here at IBD we definitely always advise that look at
you always want to make sure there’s some big institutions behind it so then
you have some powerful friends on your side so even when the stock sells off
they’re gonna come and start defending it at a certain point to prevent it from
getting really out of control it’s true and and if a company does
unfortunately fall into mismanagement perhaps you know an institutional
investor with a sizable position yeah could easily become an activist and
they’re lobbying on your behalf and the other shareholders and that’s a good
position to be in you want to have strength in the name if for some reason
the management is overpaid or they’re just not executing on their initiatives
yeah and another thing we always used institutions kind of as a confirmation
so if you if you see what you think is a great idea and but you don’t see any
great institutions behind it you know you’re missing something
because they definitely looked at those ideas but they decided to pass on it
true true or it’s just a smaller company and it doesn’t fall within their
investment mandate or they think that the cycle may take too long to develop
with a particular name so you know if you want to have some exposure and a
company like that to have as part of your portfolio just keep the holding at
a very small level right I don’t put don’t overextend yourself as you said if
the institutions are not at least sniffing around and taking a pilot
position in the name yeah it’s maybe something you want to avoid
or keep to a small exposure and and talking about position sizes what do you
recommend for your clients on on position sizes you know what’s your
typical kind of position for stocks and things like yeah so I would say the high
conviction names maybe 5% again it depends on how much money the client has
what their income needs are currently or in the next few years but I would say
you want to keep even the high conviction aims to 5% and then obviously
some of the maybe smaller cap growth names that you just touched upon not
more than 1% and really half a percent would be more appropriate yeah because
then you could definitely right up the volatility a lot better if you’re gonna
lose money in a name you want to kind of limit your losses and say hey okay it
didn’t work out but you know we’re not going to be severely punished on a
portfolio level yeah now what about earnings season too and maybe the
position sizes are gonna help here but these days it’s amazing with earnings
season how these stocks will just jump up dramatically on earnings or gap down
out of nowhere and and it’s hard to protect against that do you have any
suggestions for that yeah so that’s also a good question and yes there’s a lot of
pricing activity around earnings season and I would say if you’re a cautious
investor and you’re holding a name and it happens to run up into earnings well
there’s nothing that says you can’t sell that position prior to the announcement
or at least cut back half of your position because you just don’t know
what the outcome is going to be or how the market is going to react to it and
so if you do get a run up into earnings it may be prudent to kind of trim off a
portion of your position and wait to see and get more clarity on how the numbers
look a lot of it is guidance related not so much the prior quarter so even if
they had a good quarter and they beat earnings and they’d be revenue if they
issue like guidance going forward you know the stock is likely going to sell
off and that may leave people scratching their head saying well I don’t get it
they had a great quarter right but the market is very much forward looking and
so you’re looking at no not only the guidance excuse me of the earnings from
the prior quarter but the guidance going forward and and so when a stock runs up
into earnings selling it off do you do you try to come up with some kind of
target prices for all of your positions or are you looking for a certain
percentage hey if I’m up 20% on a position this is where I’m gonna ideally
sell it how do you how to use approach that yeah so with the positions
that I am looking to both acquire as well as sell for clients I kind of have
a ladder departure and I’m trying to leg into positions as a stock perhaps sells
off you can buy some shares and then look for a lower entry point or to get
more shares and then ultimately consolidate your position that perhaps
what you think is going to be the the bottom it’s very difficult to time the
absolute bottom and the absolute top so try not to beat yourself up over that
but again as well on the upside when you’re looking to sell out of a position
you know if it stock trades up 25-30 percent you need to be pulling back some
some of the exposure if it trades up fifty percent
you know peel off a bit more yeah and if you double your stock and that’s a great
outcome don’t be piggish right I mean that’s you know and and some of that
caveat would say and it depends on the sector you’re investing in Ryan so value
names that trade up a lot of the technology names like Apple or Google
have done incredibly well this year sixty seventy percent runs that’s not
sustainable indefinitely and so I’ve been kind of looking to call some of
those positions in recent weeks just because there still remains some
uncertainty around the trade war mmm I think the market is kind of pricing in
that we’re gonna get a deal done and maybe a big deal and I am NOT certain
that that’s going to be the case so I think it’s prudent to pull back some
exposure especially in the names that could be impacted by the the trade war
yeah and that’s part of managing your emotions too right a lot of times and
this is something that I’ve found over the years with investing the hardest is
when I’m up good on a position big on a position it’s hard for me to sell
because I’m finally right on that position he’s like you know I I made
made a judgment call I executed it and now I’m up on it you know if I sell now
it could go up even higher it can and and you know there’s that risk of
sellers were more so to speak right and all the more reason to maybe consider
selling a percentage your holdings it’s not an all-or-nothing alright so if if
you sell 30% of your holdings in a particular name and the stock continues
to run right you still wanted to go up because
you still hold additional shares and if it sells off well then you feel like
okay maybe you require those shares that you sold at a certain level but now
you’re getting in at a better entry point and you’re and you’re booking a
profit perfect manage your emotions and following a solid plan will help you
become more successful in the markets coming up next Patrick and I will talk
about three stock id-eas we’ll be back hey everyone its Alissa Coram with
Investor’s Business Daily here and I want to tell you all about our new
series investing strategies with IVD at Nasdaq where we’re coming to you each
week from the Nasdaq market site in Times Square our show is all about
helping investors make smarter decisions with their money by providing actionable
insights we’ll analyze current market conditions through Ivy DS proven market
timing perspective we’ll have analysts sharing the inside scoop on the hottest
growth stocks from top performing sectors we’ll walk you through the best
tactics for buying and selling top stocks needs yes
to give you an edge with your investments and we’ll get the latest
rhodesia Kin sites from trending companies straight from the executives
themselves investing strategies starts now we are back with Patrick Healy on
investing with IBD okay Patrick let’s get into some current ideas that are on
your radar and the first stock that we have is take our symbol AM RN a Marine
Corp and these guys are a biotech and they’ve been doing pretty well over the
last year what do you like about these guys so there’s a number of things I
like about a marine that’s a name that I just started following earlier this year
and added to position for clients it’s an Irish based firm in the biotech space
they have FDA approval on their cardiovascular drug it’s called the SEPA
and last week they had an ad come where an advisory committee meeting with the
FDA as they’re applying for an expanded label for that same drug it’s currently
approved for people with high triglycerides and they’re trying to get
an expanded label to allow a much much larger percentage of population to be
treatable with the same drug the ad combo was 16
Oh in favor and the FDA meeting is scheduled for December 28th there’s some
speculation in the market that they may even receive approval prior to that that
date and really the debate right now is over what the label warning is going to
say and how expansive the population will be for that expanded label so one
of the other things like it’s it’s a huge market there’s it really could
stand to be a blockbuster drug the the best performing drug I believe is
lipitor from Pfizer which is now off patent so I think Amran is a very
attractive takeover candidate large institutional ownership from a very
well-known health care hedge fund by the name of Baker Brothers they have
somewhere around eight hundred million I believe in exposure and company that is
a very very substantial bet by very very smart gentlemen and so I think this
company is likely takeover candidate and there
was a pullback in the stock last week as a analyst kind of issued a more of a
bearish report and I took that as a gift to do acquire more shares and so last
year it looks like last September in 2018 it had a big jump there was that
looking it was that an FDA approval or what did you remember what happened
there it was just a masked monster so that was the FDA approval for the first
indication for the SEPA and and the the addcom meeting that took place a week or
so ago was for expanded label to treat a much much larger population yeah again
the debate is over whether it’s going to be four primary preventive measures or
secondary and how big that population can be and there’s a lot of watchful
eyes on that FDA decision going into the end of the year if it’s a favorable
outcome and a broad label indication this stock is going to be a real
blockbuster I think and again a big pharma company will likely want to
snatch them up before they they grow the revenues to to aggressively yeah cuz if
it becomes a preventative kind of drug it would be like a lipitor right where
everyone’s taking lipitor to lower their cholesterol and and prevent the heart
attack and things like that right it’s a huge treatable population and I
certainly been following the name closely and you know some big hopes for
a company going forward okay so that was a marine ticker symbol a.m. RN let’s go
to the second stock and this is another biotech stock and this ticker symbol is
AC ad and this is Acadia Pharmaceuticals this is a this is a company that I own
shares in to here and and what do you like about this company you were pretty
optimistic about this one too certainly and this is a name that I
followed for three plus years now they they developed drugs to treat psychosis
related to various indications Parkinson’s disease dementia skits a
Alzheimer’s they are currently approved for Parkinson’s disease psychosis their
drug is called new have likely seen some commercials on various
networks they’ve really expanded their marketing outreach this year and you’ve
seen revenues grow significantly they just had a couple of months ago they had
interim trial read out for for schizophrenia and it was incredibly
favorable outcome of the the results so they were able to stop the trial
mid-trial save a lot of R&D money and they’re going to apply for that other
indication in the first half of 2020 coincidentally enough yesterday they
just came out with results interim results for another treatable population
for the same drug for dementia and it was a favorable outcome they met their
primary and goal and so they will be developing a phase 3 trial for that
treatable population in 2020 it’ll take a couple years but again common theme
just like amarant Baker brothers owns north of a billion dollars of this
company they they don’t make that kind of a bat unless they really feel strong
that the company is a blockbuster and ultimately could be acquired by a larger
Pharma player yeah and so now when they they got approval mid-trial was that was
that back in September when that they had that monster jump like September
13th the week of September 13th so that’s that’s what the stock jumped
significantly it wasn’t a true approval let’s let’s be clear our but the the
data readout was so demonstrative that they were able to to stop the trial at
the at the advice of the the trial experts and so they’re going to move
right into applying for expanded label for that population in 2020 it just it
first of all the company’s been growing revenue significantly in 2019 then went
through a bit of a kind of a rough patch in 2018 there was a negative article
advance by CNN suggesting that there were a lot of pretty mature deaths for
the population it ended up being debunked by the FDA and so the company
is has certainly restored its upward trajectory yeah again I think this is a
takeout candidate 2020 if not sooner yeah ya know and especially Ann you
mentioned again the Baker Brothers have you hind this too with over a billion
dollars in it so you have some these are for friends yes sorry these are both
seven billion dollar market cap type companies and so they kind of fall
within the mid-cap range so you know a lot of the big pharma players like
Pfizer like Biogen like bristol-myers just you know that just acquired Celgene
you know a lot of the big pharma players are looking to replenish their pipeline
as their big drugs go off patent and so they are flush with cash especially
after the tax legislation from 2018 they’re certainly looking to kind of buy
revenue and some of the emerging technologies and those are two names
that I really really like perfect now let’s let’s go to the third idea here
and and this is a REIT and take our symbol VTR ventus and what do you like
about these guys so when I manage portfolios for clients I try to take a
barbell approach right so some of these names in the biotech space or are
certainly alpha generating potential but there’s a lot of volatility there and
for again emotional or inexperienced investors that’s sometimes difficult to
stomach and so I am trying to create sort of a more conservative opposite end
of the barbell where you’re generating more income oriented investments ventas
is a healthcare REIT they are the biggest player in the space okay there
are a lot of very favorable demographics for healthcare senior care and assisted
living and so as the population continues to age and medical
advancements are keeping them alive then they a lot of times need that care and
it just creates a tremendous amount of demand with the older generation
for that types of property ventas is the biggest player in the space it’s a
healthy dividend named five and a half percent currently it’s a name that I
think is less Balder than some of the smaller cap REITs
I think commercial real estate is a favorable asset class given the current
interest rate environment and I think the demographics really line up well for
senior housing and that’s what ventas plays in and it’s amazing how well a lot
of these REITs have done over the last year and that that’s due to the the
lower interest rates and and these companies just continue to acquire more
more properties so that’s part of it right though the better capitalized
names the names like ventas are able to acquire smaller portfolios smaller
competitors or just portfolios of real estate at suitable valuations okay
they’re also able to use their stock as currency so as your stock continues to
rally you may be able to issue in a secondary offering at a nice valuation
without diluting your existing shareholders too much and really improve
your portfolio and and grow that portfolio we have seen interest rates
come down three times in a row now and that’s favorable for all REITs
ten-minute but also the economy has done very well in the United States and
there’s a lot of foreign investor capital coming into the US because they
realize it’s the strongest economy and that’s served very well for the real
estate space and real assets in general yeah and it’s interesting also with the
senior housing there are a number of the senior housing stocks that of starting
to hit all-time highs over the last month or so medicine’s comes to mind and
a few of the others in that group they’ve just been really rallying pretty
well over the last quarter or so so that’s definitely true and
coincidentally enough ventas has actually sold off quite a bit
their last earnings announcement a few weeks back was again the the numbers
looked fine but in terms of forward guidance they they’re anticipating a
slowdown in growth and really kind of having that pick up again in 2021 okay
and so there was a negative action on the stock which is why the
dividend yield is trading where it is and why the price is backed off from a
52-week I I think it represents a good entry point and and so when you’re
talking about the barbel approach with with the biotechs and the more volatile
stock those would be the ones where you have one percent positions or so to
handle the volatility and try to hold it for the longer term and generate the
Alpha right sure sure you have to and this is a tough thing again for people
you have to wrap your mind around the fact that you’re going to lose money in
some of these names and so you want to have a basket investing approach whether
you pick 10 or 12 names individually or you tap in through an etf rapper yeah
and there are a number of them in the biotech space that allow you to get
exposure to 30 or 40 names that you know is professionally managed but you have
to understand that this is by no means a guarantee drug development is a lengthy
and expensive process and there will be failures along the way and that you hope
that the the names that you pick two or three of them will over compensate for
some of the ones that will lose money excellent so there are three ideas to
consider and add to your watchlist thanks Patrick for joining us today it’s
my pleasure that’s it for this week on investing with IBD next week we will
have Mark Ritchie II on the show he is the Managing Partner and
Chief Investment Officer of RTM Capital Advisors so that’s it I’m Irusha Peiris
and thanks for listening you

1 thought on “Patrick Healey On Why A Mini-Correction Would Be Healthy

Leave a Reply

Your email address will not be published. Required fields are marked *