Tag Archives: hillary-clinton

Cutting Through The Rhetoric In Pharmaceutical Stocks

By Mustafa Sagun, Chief Investment Officer, Principal Global Equities It’s easy to get wrapped up in the headlines when it comes to investing. But for long-term investors, it’s important to separate rhetoric from reality. This was demonstrated most recently in the public outrage over Turing Pharmaceutical’s decision to raise the price virtually overnight on Daraprim, a drug that treats the parasite infection tonoplasmosis, from $13.50 a pill to $750 a pill – an increase of 5,000%. According to industry estimates, drugs such as Daraprim usually see a 3% to 20% annual increase. The decision made on September 21 by the firm was pounced on by presidential candidates, such as Hillary Clinton who proclaimed, “Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on.” It wasn’t long before the company reversed course on its product price increase, but nevertheless, the damage had been done as the firm’s decision to increase the price of its product had worked its way into financial markets, particularly impacting healthcare stocks. Since then (September 21 to October 6), the S&P 500 healthcare stocks underperformed the S&P 500 index by about 5%, giving back its year-to-date outperformance. This was mainly driven by ETF selling, as evident from high transaction volumes in key healthcare ETFs (see portfolio insight for more on why ETF selling is an opportunity for fundamental stock pickers). Political rhetoric aside, let’s take a closer look at the reality in this situation to determine if there’s any real negative impact to the fundamentals of healthcare company stocks. The Reality: The reality is that there’s no regulation without legislation. More specifically, there’s no legal way for a sitting president, or any political candidate for that matter, to regulate drug pricing in the United States. Only a change in current laws could do that! And bipartisan legislative action is highly unlikely for at least the next two years or for that matter, perhaps even longer. The other reality is that financial fundamentals are better than ever for biopharmaceutical companies. Business models, product offerings, pipelines, and management quality are considerably better now than they were 10 years ago, resulting in sustainable earnings growth for these companies that is superior to most other sectors of the S&P 500. Another key point is that earnings are stable, as are earnings estimates and guidance. While some stock prices are down more than 20% since mid-summer highs, valuations are attractive and, in fact, quite compelling on a PEG (price earnings per unit of earnings growth) basis. So, the relative underperformance experience cannot be explained by earnings and fundamentals. Rather, the fact of the matter is that short-term concerns, without earnings support, create opportunities for long-term investors. Granted, the healthcare sector has been a long-term winner within the S&P providing a 21% annualized return versus 15% for the S&P 500 since 2012; thus, a pullback is normal. However, we should still recognize that the healthcare sector trades at a lower multiple than the market as a whole while providing higher earnings – two sought out characteristics for fundamental investors. Our healthcare analysts acknowledge that the cloud of uncertainty over drug prices may persist for some time. However, we believe this is an opportunity to take advantage of cheap valuations in companies with improving earnings and fundamentals, as fundamentally nothing has really changed for these companies. They just got cheaper! Portfolio Insight: Focusing on Company Fundamentals As long-term, research-driven fundamental investors, we try to cut through all the rhetoric to focus on the company-specific information that affects earnings and valuations. We believe that it’s important for long-term investors not to paint an entire sector, and every company within that sector, with the same brush. After all, ETF selling by thematic investors is an opportunity for fundamental stock pickers. In other words, a healthcare ETF sells all stocks based on their association to the sector, whereas fundamental investors may buy back a select few due to their superior fundamentals. That’s the essential nature of a bottom-up stock picker; remain calm, stay the course, and focus on sustainable earnings growth that has valuation support. At the end of the day, we seek out opportunities to exploit the behavioral biases that hype and rhetoric create. (click to enlarge) While there are near-term headwinds stemming for the drug price control rhetoric from democratic candidates, fundamentals and earnings have not changed and the recent price weakness has provided further valuation opportunities.

5 Sector Favorites For Q3 Earnings And Their Hot ETFs

The Q3 earnings season has just kicked in and investors are worried about the impact that the China-led global growth concerns will have on the earnings picture. Adding to the woes were some Q2 issues like sluggishness in other developed and developing economies, lower oil prices, a strong dollar, uncertain timing of the rates hike, and a slump in commodities that spilled over into Q3. All these factors would continue to heighten the financial market instability and could dampen earnings growth. This is especially true as Q3 earnings estimates have fallen substantially over the past three months from a decline of 2.7% to decline of 5.6% as per the Zacks Earnings Trend . This is worse than earnings decline of 2.2% reported in Q2. Revenues are also expected to decline by 5.5% versus the 6.5% decline in Q1. While the earnings weakness seems broad based with energy being the biggest drag, autos and transportation are the only sectors with double-digit growth. Further, the earnings growth rates for medical, construction and financial sectors are strong (read: 2 ETFs Rising to Rank #1 This Earnings Season ). Given this, we have highlighted five ETFs – each from these expected winning sectors – that investors should definitely tap this earnings season. Not only are these picks far better in today’s investment world, they are also likely to outperform the overall market in the coming weeks. Automotive The U.S. automotive sector has been riding high with the overall industry on track to record its best year of sales since 2000. Increased consumer spending, lower gasoline prices, rising income, high demand for light trucks, a plethora of new models, need to replace aging vehicles and the easy availability of credit at lower interest rates are adding adequate fuel to the industry. These attributes will lead to a strong auto earnings growth of 21.2%, making it the best sector of the third quarter despite the big Volkswagen scandal. Investors could ride the earnings growth potential with a pure play – First Trust NASDAQ Global Auto Index ETF (NASDAQ: CARZ ) – that provides global exposure to the 37 auto stocks by tracking the NASDAQ OMX Global Auto Index. Japanese firms dominate the fund’s portfolio with more than one-third share and the top five holdings account for at least 8% share each. CARZ is under appreciated as indicated by its AUM of only $32.5 million and average daily trading volume of under 8,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook. Transportation The transport sector is expected to report earnings growth of 17.0% year over year for the third quarter. While a strong dollar is eating away the profits of big transporters, the sector remains the biggest beneficiary of cheaper oil prices, and increasing consumer confidence and spending. Further, higher demand for the movement of goods across many economic sectors acts as a major catalyst for earnings growth. One way to play this trend is with the iShares Transportation Average ETF (NYSEARCA: IYT ) , which tracks the Dow Jones Transportation Average Index and holds 20 stocks in its basket. The fund is highly concentrated on the top firm – FedEx (NYSE: FDX ) – at 11.8% while other firms hold less than 8.1% of assets. Air freight & logistics takes the top spot at 29% while railroad, trucking and airlines round off to the next three spots with double-digit allocation each. The product has accumulated nearly $846.7 million in AUM while sees a good trading volume of more than 418,000 shares a day on average. It charges 43 bps in fees and expenses and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook. Medical/Health Care Though the twin attacks of the recent global market rout and Hillary Clinton’s tweet might dampen the bottom lines of the health care companies, the sector is still expected to report solid earnings growth of 8%. This is primarily thanks to solid industry fundamentals, including rising mergers & acquisitions, emerging market expansion, positive demographic trends and innovation of new products. Investors could find the largest and ultra-popular Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) an exciting pick to benefit from the current trends. The fund follows the S&P Health Care Select Sector Index, holding 57 stocks in its basket. It is largely concentrated on the top two firms – Johnson & Johnson (NYSE: JNJ ) and Pfizer (NYSE: PFE ) – at 10.3% and 8%, respectively. Other firms hold less than 5.7% of assets. Pharma accounts for 38.8% share from a sector look, followed by biotech (24.3%), health care providers and services (19.4%), and equipment and supplies (13.7%). The fund manages about $13.5 billion in its asset base and trades in heavy volume of more than 11.3 million shares. Expense ratio came in at 0.15% annually. It has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a Medium risk outlook. Construction The housing sector emerged relatively unscathed by the recent global market turmoil, which has hit almost every corner of the investing world. The major strength came from the industry-specific fundamentals such as growing demand for homes and affordable mortgage rates. The sector is expected to post 7.5% earnings growth for Q3. Investors seeking to ride this growth could consider the iShares U.S. Home Construction ETF (NYSEARCA: ITB ) . This fund provides a pure play to the home construction sector by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 41 stocks with double-digit allocation going to D.R. Horton (NYSE: DHI ) and Lennar (NYSE: LEN ). Homebuilding takes the top spot at 64.6%, followed by 14.9% in building products and 9% in home improvement retail. The product has amassed $2.1 billion in its asset base and trades in heavy volume of around 3.7 million shares a day on average. The ETF charges 43 bps in annual fees and has a Zacks ETF Rank of 2 with a High risk outlook. Financials This sector also offers opportunities of healthy returns to investors this earnings season with an expected earnings growth rate of 7.5%. Better expense management, rising fees from surging M&A activity, lower litigation charges, solid loan growth, steadily improving credit quality, growing trading businesses and improving balance sheets are fueling optimism in the broad sector. A broad way to play this trend is with Financial Select Sector SPDR ETF (NYSEARCA: XLF ) , having AUM of $17.1 billion and average daily volume of around 35 million shares. The ETF tracks the S&P Financial Select Sector Index, holding 90 stocks in its basket. The top three firms – Berkshire Hathaway (NYSE: BRK.B ), Wells Fargo (NYSE: WFC ), and JPMorgan Chase (NYSE: JPM ) – account for over 8% share each while other firms hold less than 5.8% of assets. In terms of industrial exposure, banks take the top spot at 36.3% while insurance, REITs, capital markets and diversified financial services make up for double-digit exposure each. The fund charges 15 bps in annual fees and has a Zacks ETF Rank of 2 with a Medium risk outlook. Link to the original post on Zacks.com

IBB Shockwave: Temporary Hiccup Or Start Of The Bear Market?

Summary IBB has corrected from its all time high by up to 30%. Hillary Clinton’s snowball was catched right in the eye of the pharma industry. The scare is partially unjustified. We look on pharma future growth figures and M&A activity that will drive the secular bull market higher. We believe that IBB is a good place to invest in the long term. We mention two recent picks where we expect further share price growth. iShares NASDAQ Biotechnology Index ETF (NASDAQ: IBB ) has corrected 30% from its all time high of around $401. Several investors start to ask if we have been in the bubble territory. We discuss in this article the facts why the pharmaceuticals industry will continue in a secular bull market towards 2020. We do have a correction now, but it is not the start of the bear market in our opinion. Let’s discuss this in more details. Chart Analysis The IBB bull market started a quick acceleration in 2012. Looking on the quick rise, it is normal to have a correction. No bull market runs up without any significant corrections. Now as China spends more money on drugs also IBB is more correlated with Shanghai SSE index as compared to 2007-2008. IBB data by YCharts Now that we have touched the famous 30% correction line, could we go lower to touch 50%? Let’s have a closer look on what drives this bull market. Pharma Revenues Total pharmaceutical industry revenues are expected to increase from $1.23 trillion in 2014 to $1.61 trillion in 2018. This corresponds to a growth rate of 6-8% annually. Such a 30% increase in revenues would drive the secular bull market higher. Some leading economies are also liberating their drug prices. In June 2015 the communist party in China decided to remove the price caps on a majority of the drugs. That serves as a step towards a more liberalized drug market. We wonder if they tweeted this news to Hillary Clinton. Hillary Clinton’s initiatives might cut the healthcare spending in the United States and set some drug price caps or limitations. We hope that her initiative would not be too disruptive for the industry – if it would be implemented one day. Increasing amount of regulations, restrictions and taxes is typically pushing the businesses to delocalize. These drug firms might also allocate differently their risk capital and not always in the benefit of the patients. For this reason we think that Hillary Clinton’s initiative would end up to be a good compromise. Speaking of delocalizations, we will surely see a wave of startups in China. Currently most big drug firms have large R&D centers in China and the pool of talent has been growing up rapidly. Belgium is no worse, there the politicians compete in attracting new pharmaceutical businesses in the country with tax breaks and benefits. Should Hillary read the tweet streams from Belgium? We think so because Belgium has the highest concentration of life science employees in the whole world and the highest number of Phase I to Phase III drugs in development per capita. Consequently, that has a huge impact on the nation’s economy. We talk later of one Belgian biotechnology company in particular where we hold a long position. Pharma Expenses A topic that is rarely covered in the press is pharma industry’s expenses, i.e. operational costs. Cutting cost is an excellent and quick way to improve the P&L. Well managed companies might be busy cutting down the purchasing and inventory costs and rationalizing the working processes to be more lean and efficient. Pharma industry is still far behind the traditional industries in this. Recent study shows that in 2014 only 32% of the pharma companies procurement organizations’ executives had a full leadership of their key spend areas. The savings generated were slumping down by 45% from year 2009. The study investigated some 185 pharma sector companies with an average revenue of $15 billion. 41% of the companies were based in the U.S. So, the investors should better check how the spend dollars are controlled when investing in individual big pharma companies. A good control over the expenses is the key for creating very profitable businesses. This is why we wanted to discuss this largely uncovered reality of non-optimally managed spends in the pharma industry. There is an opportunity of billions of dollars in savings. Such a greater discipline could have a great impact on IBB over the upcoming years through higher net profitabilities. M&A’s Are Booming There have been a triple amount of mergers and acquisitions in H1 2015 as compared to H1 2014. We have already seen $221b worth of pharmaceutical deals in H1 2015. This hasn’t been considered yet in the long term industry forecasts. It is a very recent news. These M&A’s will give a further necessary tailwind for IBB. These deals will increase the industry’s key players’ profitability through operational synergies. Risks & Opportunities There are many risks and opportunities and we want to highlight here just a few: Risks Hillary Clinton’s initiatives to push down the healthcare spending in the U.S. Patents expiry on several blockbuster drugs Changing regulatory requirements Rich industry valuations: IBB is trading at a PE of 25.19 and Price/Sales ratio of 7.72 Opportunities Increased focus on Orphan indications with higher margin opportunities Drug price cap removal in China Emerging digital healthcare applications market (drug administration, patient monitoring, etc.) Faster drug development with more modern technologies available in R&D Increase of aging patient populations We believe that by balancing out the risks and opportunities the overall picture is quite positive for the pharma industry. The digital healthcare applications will become a hot market in our opinion. Speaking of the healthcare industry in the wide sense we have covered prior some surgical robotics companies. This is a good example of how the modern technology can revolutionize the market segments and bring benefits to the patients and payers. The readers may have a look on TransEnterix as one example. How To Invest? Surprisingly, we are not holding IBB in our portfolio. Such index is better suited for a passive investor. We prefer to pick individual names and do lots of due diligence on them, that we partially publish at SA articles. We currently have two promising companies in our radar with an imminent share price catalyst in Q1-16. If you want to learn more you can read our articles on Mast Therapeutics and TiGenix. Wake-Up Calls for Two Hidden Gems TiGenix has run up already over 44% since our exclusive article at SA but its valuation is still at a ridiculous level in our opinion. TiGenix (OTC: TGXSF ) already published on 23rd August 2015 that their Phase III study primary end-point was met with the final and full results coming out in Q1-16 for a treatment of perianal fistulas in Crohn’s disease. Their Cx601 allogeneic expanded stem cells drug seems to be very safe as no difference was observed between the drug and placebo groups. The peak sales potential is estimated at $900m and TiGenix trades currently at a market cap of $182m. We think that is making no sense and the share price might have quite a lot of potential to go up with the final Phase III results coming out in Q1-16. We covered Mast Therapeutics (NYSEMKT: MSTX ) at SA on 28th September 2015. It has went up quite a lot after our article was published. It is again an example of a very misunderstood company with a good pipeline drug MST-188 running in late Phase III to treat sickle cell patients. SCD patients have had no proper drug for the past 17 years and this is the first one we expect to arrive on the markets. Both these micro-cap stocks offer a good example of what we look for when picking individual names across the biotechnology sector. We are having long positions with both. Conclusions We believe that IBB is in a secular bull market. This index could still correct lower than the latest 30% drop from the all time high. Eventually, the increased industry revenues towards 2018, recent tripling in M&A activity and a better control over the spend dollars could send IBB to much higher levels. We believe that active investors might be more successful in hand picking individual companies instead of buying IBB. This would go along with a higher risk. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.