Market Reversal in Biotech Offers Bullish Set-Up
After one of the worst down days in months yesterday biotech stocks broadly reversed today giving a short term “nibble” signal. The macro environment got support from economic data as well with upward Q3 GDP revisions to 3.2% and higher consumer confidence data. The economy now has the momentum toward a more favorable growth profile especially if the new Republican administration can deliver legislation on tax reform and infrastructure stimulus.
Technicals Are Holding
Biotech stocks reversed today from a vicious sell-off yesterday with the IBB holding recent support near the $280 level and well above November pre-election lows of $246.87. The XBI was more volatile after plunging last week and yesterday but returning to the $65 level hit after the post-election rally and well above November 3 lows at the $53 level.
Large caps look a bit sluggish but we would add more Abbvie (ABBV) from a our focus list started at $56,49 and now at $61.59 with ~10+% growth projected for 2017 and a 4.15% dividend. Gilead Sciences (GILD) was up 0.4% % today holding near the bottom of its 3 months range near $74. The stock is still unloved despite a PE of 7 because of concerns about its 2017 revenue growth. Former high flier Alexion Pharmaceuticals (ALXN) flew up 5.2% today to $125.6 on a Barclays upgrade. ALXN is down 33% YTD.
Mid caps were mixed but ALNY INCY and TSRO found buyers. Incyte (INCY) is an important indicator of bullishness because it is strong technically up 30% over 3 months, has a 43.7% QtQ revenue growth rate and a strong pipeline in oncology with JAK1/2 and PD-1 targets. bluebird bio (BLUE) soared 6.18% today to the $64 level up over 20 points from early November lows! We added volatile BLUE to our focus list in Q1 at price of $43 and it hit the $75 in September.
New Picks? Go Slow
Long term investors can look at Illumina (ILMN) in the $135 range after the stock was crushed in October near $185 after missing forecasts. A double bottom has formed at $130 and sales growth is forecast at 11% for 2017. We are also long PACB, another sequencer for a January rally.
The 11% move in the Russell 2000 (IWM) since the election helped propel more than 60 small cap biotechs in the index but we hesitate to add more small caps to our focus list until we see momentum in the XBI a favored small cap play now stuck near $65. Some of our personal small cap holdings are doing well over the past 3 months such as ARRY and CCXI and we are searching actively for new ideas.
As a slight change in core holdings you should look at Fidelity Select Biotechnology Portfolio (FBIOX) as an alternative to the IBB because 2017 performance should favor a managed portfolio and stock picking now that overall momentum has eased. As a case in point ALXN a big winner today is a major holding in FBIOX as is CELG up more than 20% recently.
Politics of Health Policy
Since the election it has been speculated that the new Congress might not look at drug price negotiations for Medicare and Medicaid which would minimize drug pricing concerns . But there are still many cross currents in the healthcare sector especially understanding the impact of ACA cutbacks which could take two years to implement. For example today health insurance stocks were up with the nominee of Tom Price (R., Ga) for secretary of Health and Human Services Department who is expected to dismantle Obamacare (ACA). So it is likely we will see winners and losers among healthcare stocks in the coming months and but it will take time before we can call the shift within the sector: medtech, drugs, hospitals,insurance etc. Keep in mind that the five year bull market in drug and biotech from 2010-2015 was partially enabled by the ACA because of more patients being covered. Today for example look at UNH up 3.6%, WCG up 2.73% and AET up 2.84%
Summary
- Technicals (SMA 20) are holding from election day rally.
- Political backdrop improving for drugs and biotech but many cross currents make sector bets hard to call.
- Seasonality favors rally through January until inauguration.
- Small caps are still quite volatile and only for experienced traders.