Today's Market: Biotechs A Buy, YUM Brands Too, Staying Away From Tech

by: Matthew Smith

With the issues in Washington beginning to take their toll on the risk-on trade and the recent news out of the biotech sector regarding certain drugs and trials, we have seen the sector ETFs lose much of their recent gains. The recent sharp decline in equity prices has caused the ETFs to now look attractive and as such we are adding it to our buy list for long-term money. We would like to add some of the big biotech names, but they are still holding in relatively strong right now. The weakness in the market is caused by names such as Acadia Pharmaceuticals (NASDAQ:ACAD), Ariad Pharmaceuticals (NASDAQ:ARIA) and Celldex Therapeutics (NASDAQ:CLDX) - all of which were down sharply yesterday.

We are not just buying on valuation but also on the fact that we have seen articles such as this one from Investor's Business Daily that paint a pretty bleak picture. We have a long-term view on this and are using the ETFs to gain diversification so the short-term we are not that concerned with.

Chart of the Day:

As we will discuss further in the article today, the biotechs have been hammered in recent sessions.

(Click to enlarge)

Source: Yahoo Finance

We have economic news today and it is as follows:

  • Initial Claims (8:30 a.m. EST): Est: 318k Actual: 374k
  • Continuing Claims (8:30 a.m. EST): Est: 2903k Actual: 2905k
  • Natural Gas Inventories (10:30 a.m. EST): Est: N/A

Asian markets finished mixed today:

  • All Ordinaries -- down 0.10%
  • Shanghai Composite -- down 0.94%
  • Nikkei 225 -- up 1.12%
  • NZSE 50 -- up 0.14%
  • Seoul Composite -- down 0.07%

In Europe, markets are sharply higher this morning:

  • CAC 40 -- up 1.48%
  • DAX -- up 1.33%
  • FTSE 100 -- up 1.03%
  • OSE -- up 0.75%

A Rough Day For Biotechs…

The hardest hit biotech yesterday was Ariad Pharmaceuticals, dropping 66%, after they released this press release which showed that a large percentage of their patients dealt with blood clotting issues of some type and to varying degrees over the two years following their use of the company's leukemia drug Iclusig. One out of every five patients is affected by the clotting and the company is now working with the Food & Drug Administration, the FDA, to figure out how to address this. The plan right now is to screen all new entrants into the trials and not allow anyone in who has a history of clotting issues. This was obviously not good news for shareholders, as the drug now appears to have a serious side-effect and even if it does make it to market it would stand to reason that both doctors and patients might hesitate to use the drug due to these side-effects…if they could even use it at all.

This one year chart pretty much sums up yesterday's significance in the grand scheme of things for Ariad shareholders. The stock fell off of a cliff.

(Click to enlarge)

Source: Yahoo Finance

Two biotechs with no news out which got hit hard were Acadia Pharmaceuticals and Celldex Therapeutics. Acadia fell nearly 15% and Celldex shares were off over 11% as the Biotech ETFs fell sharply and impacted many of the mid-sized names in the sector. In the pre-market today it appears that both of these names are trading higher with a decent rebound after the recent downturn. It appears that others have wanted to add on a pullback just as we have and are using the recent weakness to do just that. We also have news out from some of the big names concerning their drugs which is being seen as bullish so everyone is looking green today.

Meg Whitman Delivering At Hewlett?

The markets were disappointed with the fact that Hewlett Packard (NYSE:HPQ) missed their numbers in recent quarters but with what was said yesterday it appears that management is warming up to the idea that they may be able to get both top-line and bottom-line growth ramped up. In our view HP is still an old-line tech giant which is attempting to find its way and some sort of niche in the new tech realm it now finds itself in and that will take some time and smart acquisitions - something the company has proven incapable of over its long history. We saw that PC shipments fell 8.6% in the third quarter and that paired with the company's businesses leads U.S. to believe that most of the growth in earnings will come from further cost cutting rather than true organic growth. Yesterday was a good reminder that HP was still around and has lots of potential, but we have all heard this talk before and we view the situation as one where HP needs to show investors the bacon before any more blind faith is placed behind management from shareholders and potential shareholders. We would really like to see some headway made in the pursuit of niches within the tech industry and away from the commoditized PC and printer businesses.

Business Not So YUMmy In China …

Every pullback thus far has been a buying opportunity, and although the chart looks toppy and worn out, that is because of the Chinese issues that have lingered and been a real headwind lately and not due to a more serious issue. We are bullish.

(Click to enlarge)

Source: Yahoo Finance

The growth story in China has powered YUM! Brands (NYSE:YUM) to new high after new high over the past few years and the company has shifted their focus to the country with the highest population in a big way. They have repositioned the company to be more levered to franchise fees and have divested many of their restaurants in the U.S. in order to expand abroad and drive margins higher. The freed up capital has also been used to fund an aggressive share repurchase program and to also pay increasing dividends. So the news that business in China was not good, and probably will not be good for at least another quarter left investors with a bad taste in their mouths. Shares in YUM! Brands were down over 7% with volume hitting 20.6 million shares, which is very strong volume for those who do not follow this name. For those willing to take a long-term approach to this name, which has worked very well in the past on dips, we would look to be buyers around these levels for an initial position. Even if the turnaround in China takes longer than a quarter or two, you still get to sit back and collect the healthy 2%+ dividend yield.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.