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Healthcare Stocks Lag but Trading Action is Picking up in Biotech

• Large Cap Biopharma are core holdings: ABBV, LLY,  MRK, REGN, VRTX, etc.
• Healthcare is a laggard with XLV down YTD but UNH is still a core position.
• Lack of Momentum in SMID caps-XBI is still the key indicator.

Not much happened in the market today which is good as we assimilate the huge gains over the past month. The Fed drama is over until mid-July when the Governors ponder the next move because a “hawkish pause ” has come to mean “they don’t know”. Powell to testify to the House today. Many of the leading strategists say the Fed rate increases are done but others say we may have two more rate increases to go because the economy is too strong and inflation is still too high. And a recession is still in ihe cards maybe “a non-recession recession”. But the rally is still too narrow with Semiconductors, Infotech, and Comm Services leading the way as we wait for a more inclusive rally with energy, industrials and financials. The next few months will have to sort out the liquidity risk as the treasury has to issue more bonds. So we are at that point in the MACRO that we have to look for positive tape action and news hitting the biotech sector. Healthcare has been a laggard with UNH down over 10% YTD due to concerns about high demand from seniors and concomitant higher costs. And large cap biopharma is stalled by government pressure from the inflation Reduction Act (IRA) pricing legislation and headwinds from the FTC on M&A. Merck filed a lawsuit against HHS.

So here is rough playbook with key portfolio assumptions:

1. Assuming the damage has been done by high interest rates and government headwinds, large cap biopharma is off their highs and offers good value with dividends. Small M&A and licensing deals can be done to fill in product pipelines like today in Immunology with Lilly acquiring DICE Therapeutics for $2.4B. New buys in value: AZN, PFE.
2. Tools and diagnostics have been a laggard since the pandemic but longer term is an attractive area. Our SMID portfolio picks have been ABT,  HOLX and QDEL.  But you can get a core position in growth leaders like TMO and DHR with one Fund, the T.Rowe Price Health Sciences (PRHSX).
3. With a trend toward more medical procedures and a growing elderly population MEDTech could become resurgent. For example, an ETF play iShares U.S.Medical Device (IHI) with a strong weighting in TMO, ABT, MDT, ISRG, SYK. A Fidelity Fund (FSMEX) also covers many Medtech stocks.
4. Two themes we have invested in are gene editing and unique tools such sequencing.e.g. CRSP, PACB, VCYT. Generative AI is expected to make big impact in drug discovery and the practice of medicine.
5. From our last SMID Life Science Portfolio Update during Fed week we saw the momentum was fading and took profits in select positions. For biotech to gain strength we need the small and mid cap stocks to rally.

While you are patient deciding next trade your cash can get a 5% yield!

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Prices as of 6/17. Weighting is a guide not quantitative.

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