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Which Market Sector Leads Year To Date?

Biotech Sector Leads Market Despite Slowing Trump Pro-Growth Agenda

Biotech Themes and Clinical News Still Motivate Investors

Drug Price Growth Expected to Slow in Coming Years

Despite recent weakness over the past month the biotech sector has continued to outperform the market. This may surprise you because of all the focus since the election on the so called "Trump Trade" which includes financials, industrials and materials, thought to be beneficiaries of pro-growth economic policies -less regulatory burden, infrastructure spending and tax cuts. Technology stocks have pulled back 2% since March 30 but the Power Shares QQQ, including both large cap tech as well as some biotech is still up 10% YTD. On the other hand, healthcare stocks including biotech have been under scrutiny mainly because of higher drug prices and "repeal and replace"Obamacare" legislation. Market forces are already reducing drug prices so consider the earnings impact in coming years.

The 2017 performance results are surprising as industrials are up only 2.6% YTD and financials are down 1.6% YTD. Healthcare is up 7.3% in second place so if healthcare can remain steady biotechs should follow. Biotech stocks lead or match performance of the strong technology sector (NYSEARCA:XLK) up 11% YTD:

FBIOX up 13.36%, FBT up 14.5%, IBB up 9.5%, XBI up 15.68%

It is interesting to note that the Fidelity Select Biotechnology Fund (MUTF:FBIOX) is outperforming the widely traded IBB by five percentage points in 2017 and seven points over one year. However over the past 5 years the IBB is still the leader because of better performance in 2016. The XBI is the five year leader up 175%. Fidelity was holding many of the big winners listed below like VRTX, INCY and SGEN.

Some well known large and mid cap stocks account for the outperformance of biotech over the past six months:

Exelixis (NASDAQ:EXEL) up 78.6%

Vertex Pharmaceuticals (NASDAQ:VRTX) up 41.3%

Incyte (NASDAQ:INCY) up 57.3%

Alnylam Pharmaceuticals (NASDAQ:ALNY) up 37.8%

Alkermes (NASDAQ:ALKS) up 30.3%

Seattle Genetics up 26.2%

Jazz Pharmaceuticals (NASDAQ:JAZZ) up 29.4%

Tesaro (NASDAQ:TSRO) up 26%

Celgene (NASDAQ:CELG) up 23.7%

Roche Holdings (OTCQX:RHHBY) up 7.44%

Bristol-Myers Squibb (NYSE:BMY) up 5.16%

Abbvie (NYSE:ABBV) up 4.87%

Over the past year three major acquisitions were completed: Anacor (NASDAQ:ANAC) bought by Pfizer for $5.2B, Ariad Pharmaceuticals (NASDAQ:ARIA) bought by Takeda Pharmaceuticals for $5.2B and Medivation (NASDAQ:MDVN) bought by Pfizer (NYSE:PFE) for $14B. However M&A has not yet been a factor in 2017 despite all the rumors.

Many smaller caps have had spectacular moves as well as you can see from the XBI outperformance. Here is just a short list of smaller cap stock winners over a six month period with market caps above $1B but under $5B:

ACAD up 41.4%, AGIO up 15.8%, ARRY up 28.4%, AVEX up 50.4%, BLUE up 52.4%, CLVS up 76.6%, Global Blood Therapeutics (NASDAQ:GBT) up 65%, KITE up 66.8%, NBIX up 38% and NKTR up 17.9%.

Summary:

  1. Although we are still recovering from a bear market defined by the July 2015 top. the overall performance is good so far in Q1'17.
  2. Trading particularly among smaller caps though volatile is lively indicating traders and investors are willing to put money to work.
  3. Healthcare should still be a favored sector because of new products, breakthrough genomics technology and demographics.
  4. Follow-on financings of $38.8B remain good in Q1 2017 after a weak 2016.
  5. A core position for non-traders could be FBIOX and XBI. Sign up for weekly updates and review previous Rayno Portfolio picks.

Disclosure: long ABBV, BMY, FBIOX, GILD, RHHBY, several smaller caps.

Disclosure: I am/we are long ABBV, BMY, FBIOX, GILD, RHHBY.