Biotech Stocks are Lagging as Momentum Trade Favors Large Cap Technology

• Technology stocks dominate gains over six weeks and lead YTD; cloud software, semiconductors and FAANG.
• Choppy trading ahead for coronavirus diagnostics and vaccines.
• Look for momentum returning in small caps and biopharmaceuticals.

We have posted several times on the headwind risks since mid -July for biotech and coronavirus stocks. Position now for a Q4 rally.

Its been a rolling bull market since early April and this week the major averages soared again with with the  S&P 500 up 3.26% and the NASDAQ up 3.39% both closing at new highs but biotech stocks have been lagging since mid-July when the large-cap weighted IBB peaked near the $145 level now at $133 off almost 10%. With the more speculative XBI, you have the same trend drifting lower from $121 in mid July to Fridays close at $108.79. Both ETFs are considerably off their March lows but in recent weeks the momentum traders have continued to pile into technology stocks (XLK) picking up more than 12%. Most of these recent gains have come from the “FAANGS” however the “work from home” and cloud computing software plays have soared and eclipse biotech and healthcare.

Leading S&P sectors for the week were: Telecom Services up 4.79%, Infotech 4.5%, Financials 4.35%. Healthcare lagged up only 1.02%.

Year to Date 2020 we have the following results: IBB up 10.4%, XBI up 14.4%,  XLK up 34.3%, QQQ up 37.6%!

The lift-off from March lows was catalyzed by life science coronavirus plays because they were perceived to be part of the solution to the pandemic: antivirals, diagnostics and vaccines. Now after a 4 month speculative boom, traders are becoming more knowledgeable and realty has set in. Many vaccines are being developed with larger more experienced companies in the forefront like AZN, GSK, JNJ, MRK and PFE. The trade has shifted from which companies have COVID technology to specifics: milestone news, clinical data and timelines. This week’s Barron article summarizes the “Contenders” and where they stand. The article is an excellent review of where these vaccines stand.

Over the coming 3 months we will be presented with mountains of data that can help identify winners in a large $100B+ potential market. But many assumptions have to be taken into consideration: pricing, rollout dates, efficacy and usage rates among the global population. And if we should keep in mind that a coronavirus or mRNA vaccine has never been developed so there is technology risk.

Investing Strategy-Hold Large Cap Biopharma. So we have done ok trading coronavirus stocks and hold many of the large caps because of other blockbuster biopharma products and dividends. We have traded smaller caps like BNTX, NVAX but currently hold only Moderna (MRNA) as a trade. Pure play vaccine stocks are likely to be choppy over next 2 months pending milestone news.

Diagnostics are in Disarray. The breakthrough Abbott (ABT)15 min. antigen test news has hit many Dx stocks hard. As we have written in previous posts, many diagnostics stocks reached unrealistic valuations and the issue of timely  test  results became a big issue. Our small cap core picks have done well and we have taken profits on AXDX, GNMK, HOLX. We will add to our Orasure (OSUR) position  at the $12 level pending progress on their rapid, in-home, self-tests and other products. Orasure has a P/S ratio of 5.63 and over $225M in cash to fund product development.

We still hold Teledoc (TDOC) as a general telemedicine play and ABT and RHHBY as core Dx plays. TDOC was one of our best long term picks with over 300% returns in 24 months. Investors who may not feel knowledgable in life science and tech should look at the ETF Ark Innovation fund (ARKK) but at $92 it is already up 65% YTD.

Biotech Portfolio Tune-up. We are currently market weight in our overall equity portfolio but overweight if you include all healthcare stocks we own -providers and medtech. We would position mid caps in coming weeks pending technicals and clinical data news. Our biotech market bellwether continues to be the XBI now near $109. We want to see biopharmaceuticals gain momentum in coming weeks so we will update you with new trades. Our current core positions other than large cap biopharma are funds FBIOX, FSMEX and PRHSX; and mid caps CRSP, ILMN. We are active traders and will update you.