Update-1 We remain on hold for taking on new positions. Biotech and healthcare stocks have made nice gains so let’s get through the earnings cycle.
Markets are jittery despite rush to new highs at opening, S&P 500 down 0.82%, as of mid-day trading over coronavirus concerns in China with 926 cases.
- Biotech stocks in a bit of a sell-off.IBB down 2%, AMGN down 4.9% with all large caps in the red.
- Risk-off as the XBI is down 2.5% to $90.93 off recent highs of $98.71.
- XLV down 1.53%
Biotech Investing Strategy 2020-Part I
Large Cap Biopharma Companies are Core Positions
We all just returned from the J.P.Morgan Healthcare Conference last week with an upbeat attitude and many investing ideas for 2020. Before we offer new 2020 trades we want to develop a framework for investing, Here are our assumptions for a biotech investing strategy for 2020 taking care not to get too bullish given the Q4 2020 run. The past year performance in biotech was a little lower than the S&P with more volatility and risk. Biotech ETFs underperformed technology (XLK) and the NASDAQ-100 (QQQ). We use ETFs to track performance because they are immediately tradable:
2019 and 2020 YTD -One year Performance:%
SPY 26.28%, QQQ 37.94%, XBI 9.06%, IBB 12.11%
We own two life science funds that you can own or use to track sector performance;
Fidelity Select Biotechnology (FBIOX) up 33.19% and T.Rowe Price Health Sciences (PRHSX) 29.11% (returns may vary with taxes and distributions-be sure to check).
Here are investing assumptions for biotech and healthcare stocks in 2020:
- Healthcare Reform and election Politics should not affect sector stock performance in H1 2020.
- The healthcare sector will hold gains and outperform the S&P-500 in 2020 because of revenue growth, stable earnings yet with a defensive aspect . The XLV at $104.49 was up 16.8% over the one year period.
- Large cap earnings will drive overall performance because of relative weighting and M&A (as an acquirer). Also they pay dividends.
- Expect volatility from M&A and clinical readouts from major clinical meetings like ASCO.
- As you can see from data the best technology investment is the QQQ which beats most funds and ETFs
- Small and mid-cap biotechnology stocks will depend to some extent on performance of the NASDAQ and the Russell-2000 as a measure of risk sentiment.
- Low rates from the FED favors stocks over bonds.The S&P 500 yield is ~1.74% compared to a US Tsy 2 year yield of ~1.53%.
So Part One begins with a core portfolio position which is large cap biopharma because of new product roll-out and the earnings potential of blockbuster drugs. For example here are major large cap picks for 2019 and one year performance (not tracking re-balancing):
- ABBV up 0.74%, BMY up 34%, GILD down 10%, RHHBY up 31.75, MRK up 20%.,
- Earnings and sales growth guidance for a few major large caps are coming this week–ABBV, ABT, JNJ, The underlying fundamentals are intact so expect no surprises.
For a review you can see our Portfolio Picks from 2018 and earlier on the WEB site.
As you can see from 2019 results diversification is important unless you depend on a few stock picks or the IBB which was up only 12.11%.The XBI offers a momentum trade up ~20% at $96.27 but with a low of ~$75!
We prefern NOT to follow a momentum strategy except for small cap picks with breakthrough clinical news. One option would be to minimize risk by choosing a fund and 1-2 ETFs.
We thank J.P.Morgan for background information and Company presentations.
Next in Part 2: New trades for biopharma mid-caps and MedTech.
Hold off on new positions until we get earnings and economic news updates.