It was nice to see a decent turnaround in the market today. Despite oil being up big throughout the day, the market spent a good part of the day in negative territory, before staging a nice rally over the past two hours of trading to post a decent day after Tuesday's deep sell-off. The NASDAQ still ended down after coming back almost all the way back from deep early losses. The Dow and the S&P 500 ended solidly up for the day. In short today was another weird day for trading action in the markets overall.
There was an interesting small piece in Zero Hedge today entitled "Trading Desks Stunned By 'Brutal' Selling: "The Crowded Trades Have Come Unglued On Obvious Unwinds". Its theory was there is a lot of unwinding of trades by major funds going on right now.
The short article reminded me of a book I just wrapped up reading called "Kennedy's Revenge: The Election of 2016" as it was a very interesting read, would explain a lot but probably had just a tad too much conspiracy theory to be entirely believable. I am glad I took the time to read both. For those that believe that the Federal Reserve doesn't always have our best interests at heart, I highly recommend the book.
Liquidation by funds would make sense as I do know a couple of friends at hedge funds that loaded up on too much energy debt early in 2015. They are as nervous as they have been since the financial crisis and the funds they work at have liquidated a lot of positions they still have long term gains on.
Liquidation would make some sense especially in some areas of the market such as biotech, especially the large caps in the sector. The sector has had huge gains over the past five years so there are plenty of opportunities to take profits to offset other losing positions. Over the past six months, the sector is off nearly 35% from its peak levels in July of last year.
There are also some incredible long term bargains available right now as big biotech is selling at its cheapest valuation since at least 2011. Given that the industry is one of the few in the market that will be able to churn out solid revenue and earnings growth in 2016 amidst a very challenging global backdrop; this is an anomaly that should not last.
I am preferring names right now that are cheap and have already reported solid quarterly numbers. These include Gilead Sciences (GILD) that just blew away top and bottom line numbers last week and raised its dividend by 10%. The company should buy back over 10% of its outstanding float this year, yields over two percent and goes for an unheard of under seven times earnings.
AbbVie (ABBV) is another bargain at under 11 times forward earnings. Profits should grow at a 15% to 20% clip this year and the stock yields over four percent. Finally, we have Amgen (AMGN). The company easily beat both top and bottom line consensus when it reported quarterly results in late January. Previously it had hiked its dividend over 25%. The company is showing solid earnings and revenue growth. The stock is too cheap at just over 12 times forward earnings with a 2.6% yield.
Given how low valuations are on these names and their solid dividend yields, it is hard to see much downside left for any of them. When sentiment improves on the sector and the market, they could see significant upside. If liquidation is going on in these names, that sure is giving the little guy a great long term opportunity to pick them up on the cheap.
Thank You & Happy Hunting
Bret Jensen
Founder, Biotech Forum