Biotech Stocks Can Provide Growth and Value

• With rising rates, traders and portfolio managers are rebalancing to value.
• Healthcare stocks lagged in February with the rebalancing.
• Small caps of all shapes and sizes still looks good. Speculation is active.

We alerted you on a Feb 15 post that a reflation trade was emerging as traders pivoted to energy and financial plays. The XBI has been in free-fall since Feb 9 until  Friday where it stabilized at $148. At this point, you have to follow the technicals as earnings and guidance are out and the major conferences are over. February gains have been wiped out but we are still up YTD if the XBI holds $140. As we have said many times the XBI is a bellwether ETF and can be volatile because it is equal-weighted and rebalanced often. This trend continued over the past week as energy and the commodity complex were leaders and the Nasdaq-100 (QQQ) down about 5%.

Caught up in the rotation sell-off were coronavirus stocks particularly COVID Diagnostics. A few diagnostics stocks (ABT, OSUR, QDEL) have been crushed as the vaccine rolls out with expectations of lower test volumes. We’ll see what happens next week to COVID Vaccine stock leaders (BNTX, MRNA, NVAX) now that the JNJ single shot  COVID-19 vaccine is expected to roll-out. Coronavirus mutants have become a cionb=cersn so we will be looking at data to see how vaccine manufacturers can reformulate to maintain efficacy. Our core pandemic positions are ABT, GILD, GNMK, HOLX, and TDOC; we would look to going long again in QDEL and VIR.

Biopharma Has Been Weak But Represents Good Value Going Forward

We recently reviewed large-cap biopharma stocks which have been in a mild correction but they can provide top-line growth plus value with dividends.  Our core holdings are ABBV, BMY, RHHBY but we missed the big move Eli Lilly (LLY), MRK missed on recent earnings and the stock took a hit. GILD is also weak but is a play on the Kite Pharma deal with CAR-T technology for lymphoma . More aggressive investors would look to trading R&D announcements from REGN or approval of an antibody-drug for Alzheimer’s Disease in June by Biogen (BIIB). As mentioned in our previous posts you can do well buying the IBB or XPH rather than picking large-cap stocks.

As a sign of weakness in biopharma note that the Investor’s Business Daily has only 2 Life Science stocks in its IBD 50 analysis. The two are:  Ligand Pharma (LGND) #24, Hologic (HOLX) #45  but two are notable -Repligen (RGEN) is a sector leader and Idexx Labs (IDXX) is a Large Cap 20 Leader.

Small Caps Are Still Leaders and Should Support Life Science Stocks

Our best winners over 12 months have been smaller caps like GNMK, PACB, and TDOC but the momentum is ebbing. The IWM is up 11.35% YTD off highs of early February, and the iShares Russell 1000 Growth (IWF) is down 0.8% YTD. The iShares Russell 1000 Value is still up 5% YTD A better small-cap ETF is the iShares Core S&P Small-Cap (IJR) up 14.35% YTD. The IPO market is still robust and low rates support the financing of biotech companies are and small.

Healthcare Model Portfolio from 10/25/20