Market Health

When to Use the Highlander Investment Strategy

Most of the time, I like to target high-growth small cap companies.

But portfolios also need to have some diversification in terms of market cap.

It helps stabilize the volatility.

You see, over the past year, the Russell 2000 Index has almost doubled the gain of the Dow Jones Industrial Average.

Though, those bulky blue chips on the Dow have been slightly outpacing small caps this year… at least for now.

Now, investing in large cap stocks in established industries isn’t boring. In fact, the sweeping changes are more pronounced here.

And there’s an evolution underway in an $8.2 trillion sector.

It will personally affect you… if it hasn’t already.

The “Quickening” in Healthcare

Some people will be quick to blame the pandemic for what has been taking place. But the reality is that this trend began long before 2020.

COVID-19 is merely quickening the pace.

The pandemic continues to hang around, squeezing every business that relies on in-person purchases. And businesses unable to pivot to digital sales have collapsed.

Beyond bars, clubs, theaters, restaurants and retail, there’s one other industry that’s feeling the pandemic pinch: independent pharmacies.

But this isn’t a story about COVID-19 killing independent business owners… It’s about the big players becoming even bigger and stronger, like in the movie Highlander.

Pharmacies are labor-intensive and costly to run. And the pandemic merely exacerbated the financial struggles that have haunted the sector for decades.

As e-commerce has gained access to every avenue of our spending, the situation for pharmacies has only gotten worse.

From 2003 to 2018, 1,231 independently owned rural pharmacies closed their doors. That number represented 16% of all rural pharmacies in the U.S.

That was years before the pandemic struck.

COVID-19 testing and vaccines actually helped ease some of the burden for these family-owned businesses. But when customers paused nonemergency prescription refills or turned to online and mail-order services, the weight was too much to bear for many of these pharmacies. And like tens of thousands of other businesses, they closed their doors for good.

In 2020, the number of independent urban and rural pharmacies fell below 20,000 for the first time on record.

And the closures have continued into this year.

But we don’t need to worry about a possible lack of access. The total number of pharmacies in the U.S. has risen 3.74% since 2018.

That’s due in part to the changing landscape of the $8.2 trillion healthcare sector.

10,000 Strong and Growing

Commercial pharmacy operators, like CVS Health Corp. (NYSE: CVS) and Walgreens Boots Alliance (Nasdaq: WBA), are expanding. And in the era of COVID-19, as independents struggle, these pharmacy giants are thriving.

CVS is the largest pharmacy operator in the country, with nearly 10,000 locations. And it controls 24.8% of the prescription drug market.

Now, as much as we might hate it, when independent operators struggle and give up ground, large pharmacies, like CVS, swoop in to fill the void.

This is an evolution that’s been taking place for years. The pandemic wasn’t the cause – it merely triggered the “Quickening.”

Over the last year, with the pandemic in full bloom, most people probably thought that being in the pharmacy segment would be a home run. But that was far from accurate.

Independent operators struggled. And it was a time when “bigger is better” rang true and the Highlander investment approach was more successful.

There are times it’s important for investors to align themselves with the biggest players on the field, whether it’s Apple (Nasdaq: AAPL), Alphabet (Nasdaq: GOOGL) or CVS. That way, they can still profit as the industry continues to evolve, change and consolidate.

In the post-pandemic world, that may be more important than ever.

Here’s to high returns,

Matthew

P.S. Do you have any comments or questions about this approach? Let me know in the comments.

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