Sifting Through Earnings Reports
The biotech sector had another down week. We started to get earnings reports this week from the stalwarts of the industry, and so far, it has been a mixed bag but results don’t warrant the continued weakness in this area of the market.
Collectively, the large cap stocks sell for their lowest valuations since at least 2011. In addition, biotech is one of the few areas of the S&P 500 showing any revenue and earnings growth amidst a gloomy global backdrop. The third quarter may or may not be the sixth quarter in a row that profits within the S&P 500 have declined on a year-over-year basis. Profits may actually come in flat this quarter but equities remain locked in a “profit recession”.
What has primarily caused the sector to sell-off is perceived political headwinds. However, the political environment has improved markedly over the past week. The presidential polls have tightened and this was before the latest news from the FBI around their renewed email investigation into a frontrunner. The Republicans are almost a lock to retain the House of Representatives and their odds are improving of keeping the Senate from “flipping” as well.
A mixed government would ensure that major legislative changes on the pharma and biotech industries are largely kiboshed. If the Republicans keep the house, I expect the biotech sector to have a nice year-end rally. If they keep both the House and Senate, get ready for a major rally from oversold levels.
Performance Update:
Our benchmark the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB), the largest ETF focused on the biotech sector with almost $9 billion in assets, is now down 24.28% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are down 10.55% on average while our small cap portion of our portfolio is now down 13.81% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 12.18%, 1,210 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 11.37%, 1,289 basis points above the benchmark.
Portfolio News:
Our small cap holdings mostly fell in line with the overall weakness in the biotech sector this week. Egalet (NASDAQ: EGLT) had a poor week as investors are getting frustrated that the FDA still has not set a decision when ARYMO ER will be approved even as the drug’s Ad Comm Panel voted to recommend approval in an overwhelming 18 to 1 vote.
Our large caps were dominated by earnings reports this week. AbbVie (NYSE: ABBV) was weak after its quarterly numbers were light on both the top and bottom line. However, the company is boosting its dividend payout 12% and will now yield 4.5% which should put a floor under the stock.
Amgen (NASDAQ: AMGN) beat expectations and raised forward guidance slightly but sold off 10% anyhow. The company stated there would be no price hikes in 2017 which triggered the sell-off. I think this was a short-sighted action as given all the recent scrutiny around the hikes in drug prices, I believe this was prudent long-term decision. I added a few shares to my core stake on this overreaction.
Ending on a brighter note, Celgene (NASDAQ: CELG) reported more than solid results by beating profit expectations by a dime a share on a better than expected 28% surge in sales on a year-over-year basis. The company raised forward guidance some for good measure. Celgene was one of the few gainers in biotech on the week on the back of its quarterly report.