Gerald Jordan // Portfolio Manager // Jordan Opportunity (JORDX)

Comments & Outlook

Despite both rising energy prices and the upward trajectory of the stock market, the energy sector has lagged the S&P 500 by as wide a margin as any time in recent memory. Investors began avoiding the energy sector due to weaker-than-expected economic data and fear over a slowdown in China.

However, there have been three sequential months of improving Chinese industrial production numbers, and electricity consumption in China is also reaccelerating. The peak summer driving season is almost here, and that will be followed by greater industrial demand in emerging markets toward the end of the year. So it’s time for investors to start rotating back into the energy sector.

Recommended Strategies

Ultra-deepwater rig supply is incredibly tight. Brazil will soon commence aggressive drilling operations, and those will require between 25 to 50 rigs. Meanwhile, another 25 to 50 rigs will be needed off the coast of West Africa over the next five years.

But rigs are fully booked for 2012 and 80 percent booked for 2013. That means most existing rigs won’t be available until 2014 at the earliest, so there will likely be a great deal of rig-building activity to meet demand.

What to Buy Now

National Oilwell-Varco (NYSE: NOV) is the largest producer of rig equipment. Although its earnings grew between 15 percent to 25 percent over the past eight quarters, its share price is virtually unchanged. Despite its continued multiple compression, I expect its earnings to reach new all-time highs in 2012 as well as 2013, especially as the market for new rig construction ramps up for 2015 deliveries.

Chicago Bridge & Iron Co (NYSE: CBI) is an engineering and construction firm. A significant portion of its business is derived from the natural gas industry. The company has booked a number of new orders in the US, as various enterprises shift from diesel fuel to natural gas because natural gas is so cheap. That will require an increase in construction of plants that can convert natural gas into liquefied natural gas, and Chicago Bridge & Iron is the leading company in that space.

Edward Yoon // Portfolio Manager // Fidelity Select Medical Equipment (FSMEX)

Comments & Outlook

The aging demographics of the developed world are leading to greater utilization of health care. But governments tend to shoulder the burden of health care costs, so health care will have to be provided in an increasingly cost-efficient manner, as many governments face incredible fiscal challenges.

As such, I want exposure to firms that capitalize on the utilization trend, while being insulated from the reimbursement headwinds the sector will suffer in the future.

In the developing world, the emerging middle class is driving demand for health care. For example, over the next five years, China will build the equivalent of the entire US hospital infrastructure. That’s an enormous growth opportunity for multinational medical device companies.

Recommended Strategies

From a top-line perspective, medical device companies should have fast unit growth and be somewhat insulated from pricing pressures. The industry generates significant free cash f low (FCF), and companies have added and destroyed large amounts of shareholder value based upon how they deployed that FCF. To that end, I look for management teams that have a keen understanding of how to use FCF to generate a solid return on invested capital.

What to Buy Now

Covidien (NYSE: COV) sells general surgery equipment such as staplers, sutures, and vessel-sealing products. The number of surgical procedures around the world has grown at a consistent low-single digit rate over a long period of time, so this business enjoys tremendous underlying demand for its products. Covidien will be one of the first beneficiaries of the globalization of general surgery and the emerging middle class’s greater access to health insurance.

The Cooper Cos. (NYSE: COO) manufactures contact lenses. Consumers pay for contact lenses out of pocket, so the industry is insulated from government reimbursement pressure. Cooper went through a period of manufacturing challenges and missed one of the major product cycles in the contact lens industry. Thereafter, we initiated a position because Cooper’s fundamentals were improving at a faster rate than its share price reflected. The company has since transformed from a turnaround play into a growth story.