We had an active first quarter, making several changes across various sectors. In our healthcare sector, we decided to sell Celgene (tkr: CELG). We originally bought Celgene based on the growth prospects from its key multiple myeloma drug, Revlimid. Multiple myeloma is more common in older people and an aging population drives an increase in the number of cases. However, key Revlimid patents are set to expire next year, and although Celgene has begun selling other drugs, such as arthritis medication Otezla, it is still heavily reliant on Revlimid sales. Furthermore, its latest earnings announcement revealed major problems, including slowing Otezla and Revlimid sales as well as a clinical trial failure for a drug Celgene had been developing in its pipeline. Celgene was a very small position in our portfolio, and we decided to sell it given the lack of revenue growth drivers on the horizon.

In our consumer discretionary sector, we bought the Guggenheim S&P 500 Equal-Weighted Consumer Discretionary ETF (tkr: RCD). As we discussed in a previous blog post, improved liquidity and lower expense ratios have made ETFs a more attractive tool to complement our core holdings. Typical market cap-weighted consumer discretionary sector ETFs hold over 20% in Amazon (tkr: AMZN). We wanted to bring our consumer discretionary sector up to our target weight without adding further outsized exposure to Amazon, so we chose this equal-weighted sector ETF.

We decided to trim the Utilities Select Sector SPDR Fund (tkr: XLU), reducing our exposure to the utilities sector. We believe this sector will face challenges as interest rates rise. Utility companies are sensitive to interest rates rising for two reasons. First, they are dependent upon borrowing large amounts of capital to maintain their infrastructure, and as interest rates rise, borrowing money becomes more expensive. Second, utilities stocks often pay large dividends and are viewed as “bond-like” investments that offer a yield. When overall rates are low, utilities stocks are attractive to investors looking for bond exposure who are otherwise unable to find any return in the bond market.

As rates rise, these investors will often sell utilities stocks because they can earn a return in the actual bond market. We trimmed our position in Akamai (tkr: AKAM) following a significant increase in the stock. In late 2017, activist investor Elliott Management disclosed a large stake in the company based on the belief that the company was dramatically undervalued. Elliott began working with Akamai management to push for shareholder-friendly changes, including cost-cutting measures aimed at boosting margins and a large buyback program. We believe that Akamai is well positioned to benefit from the increase in global data traffic over the next several years, but given the rapid spike in valuation, we took the opportunity to trim our position a bit.

We added to our position in Allergan (tkr: AGN), taking advantage of a decline in the stock that we felt was unwarranted. Allergan had declined due to an upcoming patent loss of eye medication Restasis, which only accounts for about 8% of Allergan’s total revenue. The stock had also faced headwinds on rumors of a biosimilar competitor to Botox, Allergan’s popular cosmetic drug. However, this biosimilar is at least a decade away from being ready, and Allergan still maintains a very healthy portfolio of cosmetic drugs, all of which are a cash business. We had a small position in Allergan and we decided to add to it in order to make it a more meaningful position in our healthcare sector.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.