The Rotation to Healthcare
The healthcare sector has been languishing during the past three years. Returns were close to zero in 2023 and 2024. Some life returned in 2025, but the return for the entire three-year period was far below the rest of the market. The wake of this abandonment has left this sector undervalued and replete with investment bargains.
During this time, the market has been enthralled with the AI boom and ramping up the stock prices of the companies in the race to build data centers. As these companies have become extended, Sound Advice has continued to recommend staying away from the hyper-scalers while investing in unappreciated companies and sectors that will benefit from the proliferation of AI to enhance innovation and production while streamlining costs. Healthcare is clearly one of those sectors.
A growing number of investors are agreeing recently as evidenced by new uptrend stemming from a rotation of capital from other volatile sectors, seeking less risk and more certain upside prospects.
The healthcare sector is bound to benefit from the expanding use of AI. Already, X-rays, CT scans, and MRIs are scanned and analyzed more reliably and accurately. Leading edge dentists are now employing the technology. AI is particularly useful in analyzing large data sets for discovering new treatments and medicines, as well as addressing the sector’s nemesis, cost control, by improving administrative efficiency, patient monitoring, and data management.
In addition to being prime candidates for new AI technologies that are bound to improve efficiency and accelerate growth, healthcare stocks have several traits that make them desirable long-term investments. They are well-suited for an aging population, which exerts disproportionate demands on the healthcare industry. As the world’s population continues to age, this trend is inexorable, making the healthcare sector defensive in nature and more insulated from economic cycles than other sectors.
One of the main criticisms of most healthcare ETFs is that they are dominated by a relatively small number of large companies, such as Johnson & Johnson, which distort the performance of the typical healthcare ETF portfolio.
Invesco’s S&P 500 Equal Weight Healthcare ETF (RSPH)
By investing in the 65 healthcare stocks represented S&P 500 Equal Weight Healthcare Index, this ETF weights each holding evenly. Both the Index and RSPH are rebalanced quarterly. This approach has given RSPH a superior performance to the large healthcare ETFs. RSPH has risen 2.6 percent since the beginning of the year.
AI’s power in analyzing large data sets is bound to enhance biotech companies’ ability to continue offering explosive profits and the world’s top breakthrough vaccines and treatments. Their stocks are often volatile, making diversification essential. This can be accomplished by investing in a diversified electronically traded fund (ETF) investing exclusively in a portfolio of biotech companies.
ARK Genomic Revolution Multi-Sector (ARKG)
This actively managed biotech ETF investing in companies expected to benefit by incorporating technological and scientific developments, along with advancements stemming from mapping the human genome. Technological breakthroughs in artificial intelligence and other high-tech advancements have cut the cost substantially of opening new opportunities and putting this sector on the cutting edge of many new innovations. ARKG has risen 34.9 percent since the beginning of the year.
Virtus LifeSci Biotech Products (BBP)
This is a passively managed biotech ETF that weighs the portfolio selections essentially equally, as opposed to the more typical practice of weighing selections according to market capitalization. This is an important aspect because biotech ETFs who weigh their portfolio selections essentially equally have been the best performers because they have larger investments in smaller biotechnology companies which have become acquisition targets for large pharmaceutical companies looking for ways to expand. BBP has risen 20.2 percent since the beginning of the year.
Moderna (MRNA)
This is the only pure investment play on Messenger RNA (mRNA) technology. This revolutionary technology is on a path to provide solutions for not only vaccines, but for cures and treatments for the most deadly and debilitating diseases haunting humanity. MRNA has risen 170 percent since the beginning of the year.
A vaccine for the prevention of cancer is in the works based on the Lynch syndrome, an inherited condition that increases a person’s overall risk of developing cancer, including colorectal, endometrial, ovarian, stomach, pancreatic and prostate cancers. The scientific rationale behind vaccine, mRNA-4194, is compelling. The vaccine is designed around antigens that arise from mismatch repair deficiency—biological signals that are present across many Lynch-associated pre-cancerous lesions and cancers. Millions around the world living with this syndrome are more urgently in need of preventive approaches.
While the upside is tremendous, risk is above average because earnings are not projected to turn positive for another year or possibly two. Management believes that the company’s cash reserves will be sufficient to sustain the business while it develops vaccines and treatments. Cancer treatments furthest along in phase III trials are for melanoma and lung cancer.
The Sound Advice Diffusion Indexes
The Sound Advice Diffusion Indexes (discussed in more detail later) to identify business cycles have an accurate track record of predicting major stock market trends for the last 50+ years. They work by observing changes in the most sensitive leading and lagging economic indicators that lead to shifts in interest rates. During “Aggressive” signals over the last 50+ years, the S&P 500 climbed an average of 31.5 percent. The market has undergone corrections but has never crashed. All market crashes have occurred during “Caution” signals. When the stock market was not crashing, the S&P 500 either meandered, climbed moderately, or declined in an extended bear market, recording an average decline of 0.6 percent.
The most recent signal change was in late 2022, when our Diffusion Indexes changed from “Caution” to “Aggressive”. That signal was prescient as a new bull market began.
As reliable as our Diffusion Indexes are, it is still prudent to keep an eye on the underlying indicators for any sudden changes that would reveal an oncoming adverse event or trend. One of the leading indicators used by our Diffusion Index of Leading Indicators is the “Initial Claims for Unemployment Insurance”. This is a reliable, timely leading indicator of economic activity and it does not get revised in future months, unlike many other indicators. After being steady this year through May, Initial Claims rose moderately in the last week of May and the first three weeks of June. This is worth monitoring because a continued uptrend or substantial increase would reveal consequential economic weakness.
Our next signal will come from our Diffusion Index of Lagging indicators, revealing that the economy is overheating and exerting a lasting upward pressure on inflation and short-term interest rates. Until that happens, the current bull market is still in force.
The Sound Advice Recommendations
We eat our own cooking. The Sound Advice Diversified Growth Fund invests exclusively in the Sound Advice Model Portfolio recommendations. The editor of Sound Advice for 36+ years, Gray Cardiff, manages the Sound Advice Fund and is also an investor on a side-by-side basis with the other investors. You can request a prospectus here or at the bottom of this issue..
The Model Portfolio
Individual stock recommendations are special situations offering a compelling value proposition. Also recommended are liquid electronically traded funds (ETFs) investing in sectors that are bound to benefit in the months and years ahead. Comments in bold reflect news and comments within the past month. If you click on the ticker symbol, a link will take you to more information. All recommendations, as well as their dividend yields and buy/hold/sell recommendations, are summarized in the table below and sorted by investment objective categories and then in alphabetical order.
Special Situations
The following stocks are individual companies presenting extraordinary values within their respective industries. Here they are in alphabetical order:
Cisco Systems (CSCO)
Cisco is a company in epicenter of the AI boom. Cisco supplies the backbone of data center networking equipment and software and is a direct beneficiary of the billions of capital spending slated for data centers and AI related equipment. Additionally, Cisco has become a leading supplier of security solutions for the world’s enterprise companies deploying AI into their operations.
As the mechanism of AI has moved from human driven bots to machine software driven “Agents”, the perceived cybersecurity risks of launching Agentic AI systems have grown due to the lack of control. In a recent interview on Blumberg TV’s Surveillance program, Cisco President and Chief Product Officer, Jeetu Patel, stated that a majority (61 percent) of US companies are afraid of scaling Agentic AI systems because of cybersecurity risks.
Cisco’s Live Protect is a new technology aimed at addressing this issue. Live Protect is being developed in collaboration with Anthropic and its technology called Glass Wing, which is designed to find and patch vulnerable areas in infrastructure systems. Live Protect is unique because it offers a shield while patches are being installed.
Cisco’s latest annual industrial research report, the State of Industrial AI Report, examines how critical infrastructure like factories, utilities, and transportation systems are accelerating their direct deployments of AI. The report shows industrial AI has moved from a future consideration to active deployment, with most organizations now using AI in live industrial operations where performance, reliability, and security have direct physical consequences, and 20% reporting scaled, mature deployments. Across manufacturing, transportation, and utilities, AI is powering machine vision, robotics, mobility, and safety critical operations. Most organizations plan to increase AI spending (83%), and nearly nine in ten expect meaningful outcomes within the next two years (87%).
CSCO has climbed 53 percent since the beginning of the year.
JP Morgan Chase (JPM)
Considered to be the world’s highest quality banking enterprise with diversified businesses and prudent underwriting policies, JPM is a solid value. Deregulation of the industry will continue to be a substantial benefit to JPM. The Company has a long history of growing dividends. Management says that productivity in operations is improving and that AI programs could be scaled further. Strong first quarter earnings surpassed expectations that were 17 percent higher than the same quarter one year ago. JPM has risen 4.6 percent since the beginning of the year.
RLJ Lodging Trust (RLJ)
Although RLJ increased in May, it remains a solid value. The annual dividend of 60 cents is well-covered by the company’s cash flow. The net asset value is considerably more than the price of the stock. RLJ has risen 57 percent since the beginning of the year, not including the high dividends.
RLJ has a large and diversified portfolio of hotel properties, with 96 premium-branded, high-margin, focused-service and compact full-service hotels located in 23 states and Washington DC. This is a low-leveraged REIT because the company’s debt is only 46 percent of its (book value) assets.
First quarter earnings were released in May. Revenue per average room (RevPAR) increased 4.8 percent and overall hotel revenue increased 5.4 percent over the prior year. Management was pleased with strong first quarter results, which exceeded expectations, driven by improving fundamentals, strong performance in a number of top Urban markets, and the continued ramp of recently completed, high-impact renovations and conversions.
The portfolio’s net operating income (NOI) for the trailing four quarters increased slightly to $365 million. Using a conservatively high cap rate of 7.5 percent produces a portfolio value of $4.87 billion. Adding other assets and subtracting liabilities leaves the company equity of $2.89 billion. After subtracting the liquidation value of the company’s only preferred stock of $328 million leaves equity for the common shareholders of $2.56 billion. Dividing that equity by the 149 million shares of RLJ outstanding translates to a net asset value of $17.16 per share.
RLJ’s $1.95 Series A Cumulative Convertible Preferred (RLJPRA)
This is RLJ’s only preferred stock, with a liquidation preference of $25 per share, which is the maximum value that would be received from an acquisition of the company. Use limit orders on dips below $25 to accumulate this preferred stock for a safe annual yield close to 8 percent. The dividends for this preferred only consumed 11.7 percent of the company’s cash income and must be paid before common dividends, making the yield highly secure. The ticker symbol may vary with different brokerage firms.
Special Situations in Energy
Just after they have climbed substantially as geopolitical events unfolded in Venezuela and Iran, our energy selections were moved from “BUY” to “HOLD” in our April 1 issue of Sound Advice. The rise was so steep that the risk/reward ratio became no longer favorable. At close to the peak prices of these stocks, the April 1 issue projected that energy prices would be falling as events in Iran subsided, and when that happened and our energy selections correct back to reasonable prices, they would be moved back to “BUY” recommendations. Because of the significant retracements of the stock prices recently and greatly improved valuations along with much better risk/reward ratios, our energy selections are now back to “BUY” recommendations.
Considering the longer term, as oil-rich parts of the world open up, there will be new sources of demand for the services and resources of US energy companies. Production and revenue is bound to increase even without high energy prices.
Energy providers also stand to benefit from the AI boom in two ways: Power needs from data centers is expected to double by 2030 after decades of stagnant demand in the US, and AI is a promising tool for finding, producing, and servicing natural resources.
The International Energy Association (IEA) one of the world's most authoritative and timely sources of data, forecasts and analysis on the global oil market, concluded in it’s June Oil Market Report that the world’s inventories and strategic reserves are approaching historic lows. The IEA sees a significant supply overhang emerging in 2027 as global oil demand is projected to rise by a relatively modest 2 mb/d to 105.3 mb/d. By contrast, oil supplies look set to surge by around 8 mb/d to 110 mb/d. This may provide a welcome respite to the market and an opportunity to replenish depleted inventories, or to build new strategic reserves, as countries review their energy strategies and policies in response to the crisis.
Chevron (CVX)
A strong balance sheet with low debt, along with plenty of free cash flow, gives Chevron staying power during adverse conditions with the ability to make timely accretive acquisitions. Future dividend increases are bound to be supported by production growth from assets in the Permian Basin. The acquisition of Hess Corporation (HES) in July 2025 gave the company a 30% share in the Guyana Stabroek block which holds the equivalent of 11 billion barrels with a low production cost. Chevron’s daily production has risen above 4 million barrels.
CVX has risen 9.7 percent since the beginning of the year. After soaring to a peak of $211 at the end of March, CVX has since pulled back to 166 with a dividend yield of more than 4 percent. This dividend yield puts a floor under the price of the stock and lowers the risk profile. CVX has been moved from “HOLD” to “BUY”.
Exxon Mobil (XOM)
Low production costs and production from its immense Guyana field it shares with Chevron is boosting earnings. Benefits are also appearing from the 2023 acquisition of Pioneer National Resources, evidenced by new production growth in the Permian Basin. XOM also has an attractive dividend yield with a history of dividend increases. The dividend was increased again in 2025 for a solid string of 43 annual dividend increases. After shooting to a peak of $170 at the end of March, XOM has since pulled back to 136 with a dividend yield of 3 percent, still up by 17.9 percent. This dividend yield lowers the risk profile. XOM has been moved from “HOLD” to “BUY”.
On April 22, Golden Pass LNG, a joint venture between Exxon Mobil and Qatar Energy, launched its inaugural shipment of liquefied natural gas (LNG) to Europe from Texas. Construction on the $10B LNG plant began seven years ago and expects to export 18 million tons a year when it is fully operational.
Halliburton (HAL)
As a premier oil field services company, Halliburton benefits from bringing new technology to increasing production of the world’s oil fields. The easiest portion of the oil in the world’s accessible oil reservoirs has been recovered, even in the Middle-East. Now it takes more sophisticated equipment and technology, which is what Haliburton provides. That trend puts HAL on an inexorable growth path. HAL has risen is higher by 29.5 percent since the first of the year. After climbing to a peak of nearly $43 in Mid-May, and has since pulled back to 34 with a dividend yield of 2 percent. The risk profile is higher than CVX or XOM, but the long-term growth prospects from here are good. HAL has been moved from “HOLD” to “BUY”.
HAL reported first quarter earnings in late April results that beat expectations. Revenues came in at $5.4 billion, 4% lower than the prior quarter and close to the same quarter last year.
Halliburton has technological innovations that are tailor made for the unconventional reservoirs in the US, including its directional drilling system, the iCruise CX system, which is a rotary steerable tool, and the LOGIX drilling automation platform that makes it possible to reliably drill in curves and laterally in a single run. This new technology has been rapidly deployed in the Permian Basin.
Other relatively new Halliburton technologies include the Zeus platform, electric pumping units, Octiv Auto Frac, and Sensori subsurface measurement. These systems increase efficiency and replace outdated and costly diesel generators as power sources for onsite drilling with generators capable of using natural gas, LNG, and a variety of other fuels that are available on the drilling site.
In Alaska, where some of the nation’s largest oil and gas reserves reside, Halliburton’s EarthStar ultra-deep resistivity tool and reservoir mapping service delivers unmatched performance on the North Slope. Exploring in Alaska was curtailed by the Biden Administration, but that is now expanding under the Trump Administration.
Valero Energy (VLO)
This premier oil refiner was added to the portfolio several years ago at $60.41 per share. As earnings have grown, VLO is still a bargain with a relatively low P/E and attractive dividend yield. Valero makes its money from the “crack spread”, which is the profit margin derived from purchasing crude oil, turning it into refined products such as gasoline and jet fuel, and selling those refined products.
VLO has climbed 47 percent since the beginning of the year on the prospects of expanding margins from higher prices for gasoline, jet fuel, and other refined products. VLO rose to a peak of nearly $262 in Mid-May and has remains close to that peak. with a dividend yield slightly less than 2 percent. The risk profile is higher than CVX or XOM, but the long-term growth prospects from here are good. VLO has been moved from “HOLD” to “BUY”.
Valero has the unique ability to refine both light crude oil coming from fracking in the US Permian basin as well as the sticky heavy crude coming from Venezuela. Light crude oil is great for refining into gasoline but not much else. Heavy crude is sought by refiners because it refines into many other products at high profit margins, ranging from diesel fuel to asphalt. Access to Venezuelan crude will benefit VLO over the longer term when production there increases.
Valero’s ability to refine a variety of crude oil types also gives it the ability to achieve discounts for its crude oil feedstocks. This flexibility and access allow Valero to capture the highest margins among its competitors because it can take advantage of the temporary gluts of crude, whether it’s low or high-quality crude or light sweet (low sulfur) or heavy sour (high sulfur) crude, to obtain the best available discounts for its feedstocks. The company’s refineries also have access to the US pipeline network from its gulf coast locations.
Valero’s “green energy” joint venture with Diamond Green Diesel is producing renewable diesel at large profit margins. Renewable diesel is made from animal or plant waste material which reduces greenhouse gas emissions up to 80 percent because it only releases as much carbon dioxide as the material originally contained. Renewable diesel does not congeal at low temperatures which means it can be easily transported through pipelines.
Equal Weight S&P 500 ETF
Invesco S&P 500 Equal Weight ETF (RSP)
This ETF invests in all the S&P 500 stocks but on an equally weighted basis and rebalances its portfolio each quarter to maintain its equal weights. This preservation of value is behind the superior performance over the traditional S&P 500 Index over the long-term. This ETF is bound to benefit from the broadening out of the bull market.
The Magnificent 7 stocks only represent 2.2 percent of this ETF. In 2025, RSP grew by 9.3 percent. The Magnificent 7 stocks only accounted for 0.7 percentage points of that growth.
From the beginning of 2000, RSP has outperformed all the major indexes, with an annual percentage rate (APR) of 6.99%. This compares to the Dow Jones Industrials with an APR of 5.4%; the Russell 2000 with an APR of 5.1%; the Nasdaq Composite with an APR of 6.4%; as well as the traditional S&P 500 Index with an APR of 6.3%. These returns compare to the APR of 8.9% from the Sound Advice recommendations over the same period.
Comparing RSP to the S&P 500 is a way of keeping an eye on the breadth of the market. If the evenly-weighted RSP is out-pacing the capitalization-weighted S&P 500, then the breadth is expanding which is a healthy sign. So far this year, RSP has risen 11.0 percent, slightly more than the 9.6 percent rise of the S&P 500.
Sector ETFs
Included in the Sound Advice model portfolio are the following electronically traded funds (ETFs) investing in sectors that are bound to benefit in the months and years ahead from fundamental changes in geopolitical, medical, and economic landscapes. These ETFs contain a portfolio of stocks, much like a mutual fund but, ETFs are liquid and trade like stocks with their own ticker symbols. Their prices are determined by the value of the portfolio of stocks they hold.
Artificial Intelligence
Global Robotics and Automation Index ETF (ROBO)
Robotics and automation is the key to making the world’s companies more efficient. Approximately half of the portfolio is in robotics technologies, and the other half is in the technology controlling the robots – sensing, computing actuation, and artificial intelligence (AI). This is a diverse way of investing in AI which is the next technological frontier and will be playing an increasingly greater role in the way companies operate around the world. ROBO has risen 25 percent since the beginning of the year, exemplifying the expanding use of AI.
Consumer Staples
Invesco S&P 500 Equal Weight Consumer Staples ETF (RSPS)
By investing in the consumer staple stocks within the S&P 500 Index, rhe nature of this ETF is defensive in nature and much less vulnerable to periods of soft or negative economic growth. Consumer stables are those unexciting products we use every day without much thought, ranging from food, beverages (including alcohol), household goods (including cleaning supplies), and hygiene products. These are products that people are unable (or unwilling) to remove from their budgets regardless of their financial situation. So far this year, RSPS is flat after spiking 10 percent in February as the Iran war broke out. The dividend yield is close to 3 precent on this defensive ETF.
Infrastructure and Cap EX
Trillions are going into capital expenditures. Hundreds of billions alone are slated this year to build the brains of AI – data centers and the related infrastructure. Outside of the AI boom, trillions are planned for new production facilities in a wide range of industries, from critical minerals and materials to Pharmaceuticals, to move production onto the safe and reliable shores of the US. These ETFs are bound to be primary beneficiaries.
Invesco S&P SmallCap Industrials ETF (PSCI)
Based on the S&P SmallCap 600 Capped Industrials Index, this ETF is designed to measure the overall performance of the securities of US industrial companies with small capitalizations (caps). These domestic companies are engaged in the business of providing domestic industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace, and defense, as well as general manufacturing. They will reflect the positive impacts more strongly than larger companies from an increase in domestic capital spending. Small cap construction companies typically operate inside the US on local construction projects that tend to employ local companies as subcontractors, even when general contractors may be national companies. PSCI has risen 23 percent since the beginning of the year.
Invesco S&P 500 Equal Weight Materials ETF (RSPM)
By investing in the companies that comprise the S&P 500 Equal Weight Materials Index, the portfolio of this ETF contains prime examples of basic materials companies outside of the oil and gas industries. Increased capital expenditures will translate into demand for basic materials. RSPM has risen 21 percent since the beginning of the year.
Downside Hedges
Downside hedges are part of the portfolio to reduce risk and dampen volatility by profiting during market corrections. Minimizing losses, even at the expense of limiting the upside, has been our key strategy for outperforming the market over the long run. The suggested hedges below are leveraged, so you only need relatively small investments to hedge your portfolio.
ProShares UltraShort S&P 500 (SDS)
This ETF is designed to produce two times the daily fluctuations of the traditional S&P 500 Index, only in reverse. For example, a decline of say,1.0 percent in the Index will cause SDS to increase by 2.0 percent. Conversely, an increase in the Index will cause SDS to decline by 2.0 percent. SDS is included as a hedge because the S&P 500 Index is distorted and inflated.
The stocks of the Magnificent 7 -- Nvidia, Apple, Microsoft, Amazon, Alphabet Class A (Google Class A & C), Tesla, Meta Platforms Class A, and Broadcom – comprise 37 percent of the S&P 500 Index due to their heavy capitalization weighting, and are perched at an astronomical price/earnings (P/E) ratio of 72. It should be noted that Tesla’s P/E of 391counts heavily in the average because it is such a large number. Without Tesla, the average P/E ratio is 32, but still high by historical standards. The AI race is forcing these companies to transform from low-debt, high cash flow Wall Street darlings to spenders of billions, financed by large amounts of new debt, no longer deserving of lofty P/E ratios.
Another sign that the S&P 500 Index is inflated is revealed from the Sound Advice Risk Indicator (discussed in more detail below), which compares the Index to house prices for 130 years. The latest reading is 2.7, which puts the S&P 500 Index well above the high-risk watermark of 2.0.
The Russell 2000 Index
This index is comprised of small and mid-sized domestic companies which tend to be more volatile than the overall market, especially during market corrections. After the close on Friday, June 26, this index conducted its semi-annual rebalancing. Forty-three companies graduated to the large-cap Russel 1000 because of the increase in their capitalizations (stock price multiplied by the number of outstanding shares). These were the most profitable companies in the Russell 2000. Being added are small cap company stocks primarily focused on healthcare and financial services while combined exposure to technology and industrials declined.
Prior to the rebalancing, 40 percent of the 2000 companies did not have positive earnings. The Russell 2000 is now even more sensitive to macroeconomic conditions with a greater share of small-cap companies and the loss of 43 of the most profitable companies. The portion of profitable companies in the index has experienced a steady downward trend over the past three decades. In the mid-1990s, roughly 85 percent of Russell 2000 companies had positive earnings as opposed to 60 percent before the rebalancing, which is bound to be lower now.
The following two ETFs below can also be used as a downside hedge because they short sell the Russell 2000 index. They differ in the leverage employed, which you can choose one according to your investment objectives and risk tolerance.
ProShares UltraShort Russell2000 (TWM)
This ETF is designed to produce two times the daily fluctuations of the Russell 2000 index (IWM). A decline of say,1.0 percent in the Russell 2000 will cause TWM to increase by 2.0 percent. Conversely, an increase in the Russell 2000 will cause TWM to decline in the same fashion.
ProShares UltraShort Pro Russell2000 (SRTY)
This ETF is designed to produce three times the daily fluctuations of the Russell 2000 index.
A Final Note from the Editor
My 50+ years of investing has taught me some valuable lessons: Stay diversified and manage your risk. Keep in mind that a 50 percent decline, for example, requires a 100 percent recovery just to break even. Avoiding or hedging for severe declines, along with analyzing the risk/reward ratios of individual investments, is the secret to superior investment results over the long term, even if it means giving up some upside. This is why the Sound Advice portfolio has not only outperformed the S&P 500 and other market indexes for more than 25 years, it has done so with lower risk as measured by the Sharpe Ratio, a widely accepted method used to quantify risk by comparing the investment return to the volatility of a portfolio over a period of time.
Best regards and happy investing.
– Gray Cardiff.
