...Who Are Looking to Buy Drugs
by Marc Lichtenfeld,
Senior Analyst, Smart Profits Report I guess I’ve always been a contrarian. Not only when it comes to investing, but in other areas of life... I liked a lot of the music that I listen to well before the bands got “cool.” In fact, I was so early on some of them that years later they still aren’t cool. On Father’s Day, while many of my friends, given the day off by their spouses, lounged around, watched sports on TV and drank ice-cold beers, I toiled in a hot kitchen, preparing a Father’s Day dinner for my family. But don’t throw me a pity party. It was my choice. I wanted to do something special for my Dad. The point is, I’ve always thought for myself – not too concerned with what other people are doing or might think. It’s why we go to out-of-the-way mom and pop restaurants rather than the big chains, take vacations in spots that are off the beaten path, and for years have had smaller cars and TVs than nearly all of our neighbors. My contrarian tendencies spill into my investing career, as well. In the longer-term, there’s just a lot more money to be made by going against the crowd. And one sector in particular is beginning to look more attractive by the day… Time to Buy Stocks in Big-Cap Pharma? I’ve made a living picking stocks and sectors that go against conventional thinking. Recently, I suggested that the airline sector was worth keeping an eye on. Keep in mind, I wasn’t ready to pull the trigger on the group yet, but believe investors should have the industry on their radar screens. There’s another sector that has been beaten up pretty badly that no one wants to touch these days – large-cap pharmaceuticals. In fact, Investors Business Daily ran a story on Friday detailing big-cap pharma’s woes. As the story pointed out, several stocks, including Merck (NYSE: MRK), Bristol-Myers Squibb (NYSE: BMY) and Pfizer (NYSE: PFE), all hit multi-year lows on Friday. The giant drug companies are in trouble. Patents are expiring on various blockbuster drugs over the next few years. And as a result, generic competition will potentially suck billions of dollars out of their revenue streams. Additionally, their pipelines of new drugs are weak. So the revenue lost to generics won’t easily be replaced. Two weeks ago, my colleague Jim Stanton looked at the charts of Big Pharma and correctly declared them still bearish. I’m not going to argue with a chartmaster like Jim. But I do think value investors should start thinking about which drug stocks look most appealing when they eventually turn around. And they will turn around… Just in the past decade or so, the sector has had several remarkable changes in direction. Between August 1997 and April 1999, the Amex Pharmaceutical Index rose 92%. Over the next year it slid 32%. As the rest of the market began to plummet during the early stages of the bear market in 2000, the index rebounded 54%. That was followed by losses of 47%, gains of 57% and a current loss of 23% from the recent high. | Nine of the top 10 holdings in the Health Care Select SPDR (AMEX: XLV) are pharmaceuticals. Here's how the five biggest holdings have performed since January 1st, including dividends: | | Company | Return | | Johnson & Johnson (NYSE:JNJ)* | -1.3% | Pfizer (NYSE: PFE) | -21% | | Merck (NYSE: MRK) | -38% | | Abbott Labs (NYSE: ABT) | -1.5% | | Wyeth (NYSE: WYE)* | -1.0% | | *Johnson & Johnson scheduled its next earnings release for July 15th. Wyeth reports on July 23rd. |
Loading Up the Bargain Bin With Healthcare Stocks A few names in the sector are absolute bargains. After several weeks of research, I’ve found a large-cap drug company that is trading at fire sale prices, pays a healthy dividend and most importantly still has a good outlook for growth. It is exactly the kind of stock that I look for – one that is hated on Wall Street, but still has a good business. The upside potential is huge while I’m confident the downside risk is limited. (I will be revealing the name of the stock in the July issue of the Xcelerated Profits Report.) And while it’s by far my favorite, I believe some of the other drug stocks are nearing levels where they will become attractive, too. But don’t look to the mainstream for confirmation. With the sector down more than double the loss of the S&P 500 this year, most pundits recommend you stay far away from the drug companies. They won’t be likely to get on board that train until it is already out of the station and halfway to Profitsville. Again, like my column on airlines, I’m not suggesting you jump in now. Just monitor the sector for signals that the group is bottoming. I’ll certainly be watching closely and will let you know when the sector as a whole becomes a buy. Good investing, Marc Lichtenfeld
P.S. In the meantime, if you want to get in on the company that could lead the way up from the basement, be sure to check out the July issue of the Xcelerated Profits Report. (If you’re not yet a member, you can sign up here.) The second stock I ever picked was a giant pharmaceutical maker, back in 1990. After splits and mergers, the stock went on to become a 7-bagger (though admittedly I got out way too early). This is the first time since then that I’ve been excited about a company in the sector. And by this time next year, it may no longer be a contrarian play.
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