As The Rally Resumes, Look to Biotech’s Bargain Bin

Another day, another record close. The major indices on Monday again hit new highs, in the wake of President Trump’s vow last week to deliver tax reform that’s “phenomenal.” The market’s renewed winning streak prompted this email from a reader: How long before the post-election rally dies?”

The question reminds me of this famous bit of wisdom from baseball legend Yogi Berra: “It ain’t over till it’s over.”

Sure, markets as a whole remain excessively valued and numerous analysts are calling for an overdue correction. But to continue with the sports allusion, you don’t have to sit on the bench. In fact, as I explain below, bargains can be found in one sector in particular: biopharmaceuticals, which has taken an unfair beating largely because of overheated political rhetoric over drug prices.

First, let’s see what our in-house experts have to say about this “Trump rally” that just won’t quit.

A green light for investors…

Joe Duarte, an analyst and biotechnology expert with Breakthrough Tech Profits, acknowledges the risks but nonetheless thinks the broader market is giving investors a green light:

“There is a stock market crash ahead.  But that doesn’t make today any different from any other day.  And while the bears are growling the charts are saying we are about to see prices increase at an accelerating rate.

A bull market does indeed climb a wall of worry at times, and this is one of those times. With protestors out en masse; countries, cities, and states fidgeting over Trump; and the political pressure building on both sides of the aisle, there is no shortage of reasons to worry.

Yet in the realm of technical analysis the green light has just brightened as the market has just broken out to new highs that have been properly confirmed by multiple momentum indicators.

Yes, I know that things could change in a hurry. But in the world of investing you have to stick with what’s working until it stops working.”

That said, companies lacking earnings growth momentum are vulnerable. As Jim Pearce, chief investment analyst of Personal Finance, observes:

“With the stock market near record highs and investors growing increasingly nervous about the Trump administration, companies that do not have a clear path to higher profits are getting hammered.”

Jim cites the increasingly competitive field of biotech, where products often don’t pan out and there’s a price for corporate lethargy. But drug companies with inherent strengths should flourish in 2017.

Biotech’s bounce back…

The pharmaceutical sector was hammered in 2016 by accounting scandals, alleged price gouging, and the harsh political rhetoric of a campaign year. Nonetheless, drug makers enjoy powerful tailwinds that should prevail despite temporary setbacks.

The SPDR S&P Pharmaceuticals ETF (NYSE: XPH) plummeted 21.9% in 2016, mostly because of pressures that are already easing.

During the bitter presidential campaign, candidates of both parties took crowd-pleasing jabs at drug companies, condemning their supposedly predatory pricing practices. But that was then; this is now.

Despite his “populist” broadsides against drug companies during the campaign, the newly elected Donald Trump has appointed several anti-regulatory veterans of corporate America to his administration, a clear sign that he won’t do anything to impede the growth of industries such as biotech.

To be sure, the prices of generic drugs have been dropping, as pharmacy benefit management plans, health care providers and federal and state governments put pressure on drug makers to make their treatments more affordable. However, the pessimism over drug prices is overdone and there hasn’t been any fundamental worsening in overall drug pricing.

Irreversible demographic trends also favor drug companies. The World Health Organization estimates that the global population of people aged 60 and older will burgeon from about 900 million people today to more than 2.1 billion by 2050. As people get older, they get sicker and require greater levels of health and drug care.

What’s more, the Food and Drug Administration under Trump is bound to pursue expedited drug approval times and lower oversight. Faster clinical trials would be a shot of steroids for drug development.

Large biotechs still face the threat of patent expiration, but when they need new drugs for their pipelines that can deploy ample cash hoards for the acquisition of smaller, innovative biotechs. Trump’s tax policies are likely to fuel a wave of mergers and acquisitions, especially in the cash-rich technology and biopharma sectors.

The takeaway: Biopharma stocks may be out of favor, but they’re among the few reasonably valued growth bets left in this ever-rising market.

One underappreciated gem right now is Bristol-Myers Squibb (NYSE: BMY), a denizen of the Breakthrough Tech Profits portfolio. As the publication’s analysts recently noted:

“Bristol Myers, which has recently fallen on news of problems with its Opdiva cancer franchise, could see a nice bump from its blood thinner Eliquis, especially if it can start to apply some pricing pressure. Eliquis is steadily becoming the number one blood thinner in the business.

BMY also has Orencia, another rapidly rising agent aimed at treating rheumatoid arthritis, which can also benefit from some loosening up in insurance company and Medicare purse strings.”

Got a question about opportunities in biopharmaceuticals or any other sector? Shoot me an email: — John Persinos

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