Biotech Blues: Earning season ahead so stay balanced.

• The Huge Gains in Large Cap Technology Stocks has eclipsed Healthcare as a defensive allocation.
• Stock Pickers and Life Science Funds should outperform biotech ETFs in a Weak Sector.
• Life Science stocks lack momentum so be prepared for rebalancing and rotation shifts.

You’ve heard by now about the huge gains over six months for equities but alas not so much for biotech and even healthcare stocks. It’s a bifurcated market. The QQQ is up 38.73% YTD and the S&P is up 15.9 % YTD. The results for key biotech ETF sector performance has been very disappointing given the momentum of tech. Even the S&P is doing better in 2023. Biotech peaked in August 2021 and is unlikely to regain momentum until Q4 2023. Moreover, the XLV Healthcare SPDR Fund has been flat since Aug 2021. Keep in mind that many investors prefer healthcare because of its defensive nature but not over the last 2 years.

(Click on image to enlarge)

• iShares NASDAQ (IBB) Down 3.3% YTD, Up only 15.61 % over 5 years.
• SPDR S&P Biotech (XBI) Flat up 0.24% YTD, Down 12.6% over 5 years!.
• Healthcare SPDR (XLV) Down 2.3% YTD, Up 59% over 5 years.

in our recent posts we mentioned some of the underlying reasons for this underperformance like government intervention in drug pricing and FTC actions on M&A. Also rising healthcare costs of about 7%/yr are a major concern. We also published a “playbook” of sorts a way to look at subsectors in healthcare like tools, diagnostics and MedTech. The T.Rowe Price Health Sciences Fund (PRHSX) hold may of the top MedTech, tools and biopharma stocks so we should see gains here. But even the large cap biopharmas can be volatile like Regeneron (REGN) down 8.45% for the week because of the FDA delayed approval on a next-generation Eylea drug and AstraZeneca (AZN) over the past week on mixed results for a lung cancer drug. And everybody knows about Eli Lilly (LLY) the hottest of the large caps UP 28% YTD due to its blockbuster diabetes and obesity drugs.

(Click on image to enlarge)

Small and Mid Cap -SMID Growth -in Life Science Stocks

The best trading opportunities for the Life Science/Biotechnology sector should be SMID stocks. We gave our last update for this portfolio on June 14 when weakness became apparent. especially with the XBI. We still hold many of these stocks and will publish a new portfolio sometime in the future. Best picks have been CRSP,  GERN, and PACB but volatility remains high.

Allocation: Health Care vs Generals

Healthcare currently represents about 13.3% of the S&P 500 compared to 28.14% for technology (XLK) so if you were underinvested in tech behemoths or “Magnificent Seven” stocks you were a gross underperformer. And the AI buzz helped the long term view for technology investing.  So given the uncertainty with upcoming earnings and skew of performance one can make case for a balanced portfolio like long SPY until a trend becomes apparent. And of course, cash is a real competitor to stocks offering 5% yield.

Disclosure Long: ABT, LLY, MRK, PRHSX, IHI, IWM, UNH. And most large-cap biopharmas below.

More By This Author: