Musculoskeletal Stocks Outperforming Broader Markets During Financial Crisis
BY MATT LOESCH, OCTOBER 6, 2008
Musculoskeletal stocks have performed relatively well year to date only down 14% compared to the S&P 500, which is down 25%. Despite financial uncertainty roiling the market on what seems like a daily basis, musculoskeletal stocks have displayed resiliency to each negative revelation.
To understand how musculoskeletal stocks have reacted to negative financial news we chose to measure them against three of the most significant announcements this year:
1) The government facilitated buyout of Bear Stearns (Post BS)
2) The government take over of Fannie Mae, Freddie Mac and AIG (Post FF)
3) The bankruptcy of Lehman Brothers (Post LEH)
Additionally, we segmented musculoskeletal stocks into two groups, above and below $2 billion in market cap, to see what impact, if any, company size has had on performance.
Prices as of the close 10/3/08
There is no doubt that musculoskeletal companies have been negatively affected by recent events along with the general market. However, it is also clear that musculoskeletal companies have outperformed the S&P 500 in each period we measured, regardless of market cap group. This supports the notion that musculoskeletal stocks are defensive in nature and that there are fundamental factors that help protect these companies in times of economic uncertainty. For more on fundamental factors see our blog Musculoskeletal Companies Buffered But Not Isolated From Turmoil.
In addition to the factors mentioned in that blog, and in part because of them, there is another phenomenon that may be at work here a flight to quality. Flight to quality has been a theme over the past few weeks, as demonstrated by t-bill prices hitting abnormally low yields. In times of high uncertainty, investors look for safe and secure places to put their money, and in this market a popular investment is to loan money to the US government by buying treasuries. All of the demand to purchase t-bills actually pushed real yields into negative territory. This means some investors preferred guaranteed small losses on t-bills to earning a return on a more risky investment, such as a money market fund at a bank that could possibly go bust. This flight to quality has likely helped support musculoskeletal stock valuations as well, as these companies have the characteristics that investors crave in this environment - business models that are not tied directly to the economy, steady cash flow generation and solid balance sheets with little or no debt.
