Update-3 10/21 11a EDT Another day with a brisk sell-off in momentum stocks. Coronavirus plays hit hard: BNTX, QDEL, NVAX, OSUR etc. Is this sentiment shift from lack of stimulus or just election anxiety?
After the close: CRISPR Therapeutics (CRSP) down 12.95% to $92.90 on a patient death in a Phase 1 B- cell Lymphoma trial, with a CAR-T cell therapy. The XBI was down 2.34%. RISK OFF situation.
- XBI failed to break through double top now down 1,38% to $115 level.
- Mid-caps and gene therapy sub-sectors weak.
- Large caps in the red portending little help from Q3 earnings.IBB down 1.46%.
Update-2 10/20...A weak lackluster day with more red than green Healthcare sector (XLV) has been stalled for 3 months at $106 handle.Some big losers despite indices holding. Gilead Sciences (GILD) barely holding at 52 week lows near $60 after indigestion from Immunomedics deal.
Update-1 10/19 at 9:40a Orasure Technologies (OSUR) Soars 25% on FDA Emergency Use Authorization.
Hot Biotech Sector -What’s Next?
Many institutional and now retail investors are trading stocks in the hot biotech sector in 2020. We are doing well this year and here is a strategy and market update.
- ETFs are outperforming the S&P which is up about 8% YTD: IBB up 20.4% at, $139.71, XBI up 26.8% at $120.62. Both are trending up near JY 2020 highs.
- Life Science Funds we favor and have covered are also beating the S&P YTD: FBIOX up $14.94%, PRHSX up 14.23%.
- But the NASDAQ-100 QQQ at $288 is up 35.5% YTD also trending up from the mid-September bottom.So why trade volatile small cap biotech stocks when the QQQ outperforms?
- The market correction in September hit the S&P 500 just as hard as biotech stocks so assume there is no advantage to underweighting tech and biotech stocks.
Market Sector -Remain Overweight Biopharma and Diagnostics
So the issue for an equity portfolio in another “risk-off” situation should be to raise cash not sell biotech stocks. Presumably any major correction would be caused by a weaker economy and the pandemic.The pandemic economy is ameliorated by “work from home” tech stocks. The solutions to the coronavirus pandemic are vaccines, diagnostics tests and antivirals. Despite valuations that are too high the pandemic news and top line growth favors drugs and diagnostics. In portfolio management today underperformance comes from underweighting technology stocks.
Stock Picking and Trading in the Hot Biotech Sector
In a hot momentum driven bull market you can always find stocks to trade day by day. The hard part is holding on to your pick over the years for long term capital gains. I can give many examples of longs I traded way back that I should have held through bear markets like Regeneron (REGN) and Seattle Genetics (SGEN). But what happens is even a large cap stock like Vertex Pharmaceuticals (VRTX) has a bad day and you lighten up. COVID vaccine stocks are hot but the big gains were made early in the year so this time the trade may be difficult because of all the players. So if you have big gains in the leaders: BNTX MRNA NVAX you can add or take profits. But for a new investor COVID vaccine stocks are a tough play. Better to own a large diversified company like JNJ or Pfizer that has a vaccine project.
Hot Biotech Stocks and Current Portfolio-Momentum Works Both Ways
The best trade reiterated over the years is the XBI, not that it is easy to pick an entry point. Add a mutual fund or the IBB and you have a core portfolio.
As we have covered in different posts we favor large cap biopharma stocks with dividends for the long term: ABBV, BMY, MRK,RHHBY, etc.
Two of our recent picks are up 3X: Genmark Diagnostics (GNMK) and Pacific Biosciences (PACB). But GNMK had too much momentum so we took some off as it faded.
Orasure Technologies (OSUR) we started positions in the $10-11 range but it weakened when it hit $15. The play is a rapid COVID test based on saliva. Track core coronovirus DX plays: ABT, HOLX, QDEL, RHHBY, TMO.
TeleDoc Health (TDOC) has merged with Livongo but still looks good if it can stay above $200. We picked TDOC around $50 in Jan 2018. earnings are in October 28. TeleMedicine is a long term trend.
We missed a few trades in the Mid-Cap sector that are potential long term winners: BPMC CRSP XNCR etc.We will update during biotech sector volatility.
Until we see a shift in the global economy or some fundamental changes in large cap earnings we see no reason to rotate out of biotech or tech stocks.