Update-1 …Stocks Surge under FED’s new “Recalibration” Policy
After some hesitation and whipsaw action yesterday the 50bps rate cut by the FED sparked a broad rally today with the NAZ leading up above 2.5 %. Many talking heads and economists were surprised by the big cut.looking for data as rationale to support the policy. But let’s assume for now that the “recalibration” policy was made as an insurance policy to protect jobs and stimulate housing in a “soft landing” scenario. Tech stocks and industrials are leaders in early trading. AAPL regained its cache up 3% and AMD was up 4% as chip stocks reasserted leadership: AVGO, NVDA, QCOM etc.
But large cap biopharmas lagged as did other defensive groups like utilities and healthcare with the XLV up only 0.3%. SMID biotechs are major beneficiaries of lower rates. The ARKG, IBB and XBI surged over 2% as did most of the SMID biotechs on our trading list: ABOS, CPRX, CYRX, PACB, VCEL,VCYT etc.
BULLISH Playbook for Biotech Stocks
- Expect more volatility with the rate cut cycle ahead and more strategists talking the need for a 50 bp cut– “The FED is behind the curve” chatter,
- Life Science mutual funds and ETFs performance are catching up with technology sector funds.
- Large cap biopharmas lead the market in early trading with the DOW at new highs. Laggards up today AZN,MRK and PFE.
Not much has changed with our strategy since our bulish August 20 PLAYBOOK on biotech small cap trades. We were a bit more cautious in August because of seasonal factors and small caps in general were lagging with the iWM and the IJR lagging YTD. But have a look at the more speculative ARKG still down YTD but gaining MOmentum MTD.. The general market rallied last week focused on large cap technology stocks with the MAGS at 45.25 up 3.22% MTD, up 5.28% YTD led by NVDA at 119.10 up 2.55% MTD, up 140.5%,YTD and the volatile XLK at 220.44 up 3.16 % MTD, 14.53% YTD. But it’s a roller coaster during the last 2 weeks.
NOTE that biotech funds are beginning to outperform technology funds.
Here is brief summary our biotech investing and trading strategy on AUGUST 20.
BIOTECH Bull Market PLAYBOOK
- Conservative Play: Buy one Mutual Fund T.Rowe Price Health Sciences (PRHSX)+ a little XBI.
- ADD diversification with MEDtech; Fidelity Select MEDical Devices ( FSMEX). or Fidelity Select Biotech (FBIOX).
- BUY PRHSX for long term and Buy several SMID stocks from our list below. Careful-very volatile stocks.
IF you followed our post over the last two years you know that we have focused our portfolio picks on large cap biopharmaceuticals with our top picks: ABBV, LLY, REGN and VRTX. We have also mentioned other large cap stocks in biotechnology for dividends and longer term appreciation like AZN,GILD, MRK and RHHBY. If your healthcare portfolio held these four stocks over the past 2 years they were up over 50% with dividends.
- What’s Next? So now we are looking at SMID stocks as the next play, while holding on to our large cap winners.
Here are some performance results from our key indicators:
- Biotech ETFs: IBB at 147.81 up 2.97% MTD and 8.8% YTD, XBI at $101.21 p 4.39% MTD and 13.35% YTD.
- Diversified Life Science Funds: PRHSX up 3.54% MTD and 16% YTD, JFNAX at 79.57 up 3.02% MTD and 17.85% YTD, FBIOX up 6.26% MTD and 21.82% YTD.
This outperformance shows the Life Science sector remains strong and even the managed funds are doing well so little need for the retail investor to speculate on clinical stage SMID stocks. See XBI chart below:
As for the large cap biopharmas last week we published our performance and metrics review last week. Most of our top large cap picks:ABBV LLY REGN and VRTX are near their highs so few compelling reasons to rebalance at this time. Otherwise AZN and MRK are laggards while GILD is a leader. Some analysts have cautioned on LLY as the valuation is being questioned.
To those readers that have the staff and capabilities to trade from our LIST the results have been good with many winners. The past week showed stronger MOmentum.We currently hold the following SMID caps from our list which will review at month end: ABOS, ADPT, CPRX, CRBU, CRMD, DNLI, GERN, PACB, ROIV, VCEL,VCYT.
NOTE we sold the following stocks too soon: RZLT NTRA TEM but have traded several others at a profit.
We recently initiated a new trading long at $45 with Quidel-Ortho (QDEL) a former high flier formed by the merger of a high growth diagnostic Company Quidel with a mature but profitable ORTHO Diagnostic Systems a spin-out from JNJ. The Market cap is 3.08B with Revenues of $2.83B and a P/S ratio of 1.09 and a Fwd PE of 15.2. An average of analyst recommendations is 2.12 with a Craig Hallum upgrade to buy on 9/5.
