The debate about being diversified across sectors will never end. I know I could invest in a portfolio and never know my sectors weights, but to others sector weights are very important.
When I wrote about the ETF - SMOT - a few posts ago, I came across an interesting set of sector weights that Morningstar calls Mid-Cap Blend. This new index eliminates some of the bias toward financials that effects many straight value indexes.
I have given up even thinking about the S&P 500 until the current craziness subsides.
I think this set of weights is more representative of the mid-cap world:
Industrials - 20%
Technology - 16%
Consumer Cyclical - 14%
Financials - 14%
Health Care - 10%
Energy - 6%
Real Estate - 5%
Consumer Defensive - 5%
Materials - 5%
Utilities - 3%
Comm. Services - 2%
Obviously it is hard to diversify using 10 stocks, but let’s try:
Industrials - 20% - Chart Industries 10% - underweight
Technology - 16% - 0% - underweight
Consumer Cyclical - 14% - Red Rock, Unifi - 20% overweight
Financials - 14% - Royal Gold (royalties are a financing method, so humor me) - 10% - underweight
Health Care - 10% - Smith & Nephew - 10% - market weight
Energy - 6% - 0% - underweight
Real Estate - 5% - 0% - underweight
Consumer Defensive - 5%, Tyson, Treehouse - 20% overweight
Materials - 5% - Corteva -10% overweight
Utilities - 3% - Kinder Morgan - 10% overweight (KMI is more a utility, than an energy stock)
Comm. Services - 2% - Cable One - 10% overweight
This is a very long exercise to make this point:
I am not going to chase expensive technology stocks just to balance the portfolio, but I did want to have at least one health care stock in the portfolio to provide some diversification.
There are plenty of cheap health stocks to choose from. I chose Smith & Nephew - SNN - a premium maker of artificial joints selling at only 15x, and with a 3.4% yield. My other potential choices were:
Revvity - the big Select Equity holding, lab equipment
Acadia Healthcare - mental healthcare, too much Medicaid
Avantor - lab consumables, the old Malinkrodt, interesting
Royalty Pharma - drug financing, risky
Henry Schein - dental supplies, boring
Azenta - biopharma storage, high upside
Hologic - women’ health drugs, solid
Roche Holding - big pharma, play against the US $
Organon - spinoff, boring
Viatris - generic drugs, risky
Any of these 10 is a reasonable alternative. I know SNN because I followed the career of a artificial joint sales guy that also worded for Stryker and Boston Scientific.
The smart guys at Barrow Hanley just doubled their position in SNN in Q1, 2024
I think I should have one healthcare stock in the portfolio.
Maybe I should have one technology stock, but everything I like (Teradyne, Corning, Logitech, etc.) has run.