Healthcare Stocks Subject to Government Policy

The market this morning isn’t moving much, but today’s tepid start is coming on the heels of yesterday’s record closes on the Dow, the S&P 500, and the Nasdaq 100. Whether the strong start to November will continue is uncertain in this historically strong-performing month, but if it does, it will be the result of how it fares in the face of earnings results, Fed policy, economic reports, and whatever other news we are confronted with. 

For today at least, the name of the game is earnings. Under Armour UAA beat expectations on the top and bottom line and also raised its full-year outlook. Although the overall sales number didn’t wow as much as some would have liked, it appears they more than made up for it with their brick-and-mortar sales. 

Pfizer PFE released earnings too. The pharmaceutical giant did well, and the market is rewarding their numbers in this morning’s pre-market trading. They reported fiscal Q3 adjusted earnings of $1.34 per share, beating the analysts’ consensus estimate of $1.09 per share. That was also a strong increase from the $0.59 they reported last year. Revenue also beat expectations. 

DuPont de Nemours DD also had an earnings beat ($1.15 actual v. $1.11 est.) but cut its outlook. The company is a victim of the “supply-chain drain” that we have seen often lately. Conoco Phillips COP also beat estimates, turning out a $1.77 profit after losing $0.31 a year ago. The company benefited from rising oil prices; however, the stock is mostly unchanged in pre-market trading. 

In non-earnings news, Tesla TSLA is down around 4% in pre-market trading after Elon Musk tweeted that the much-hyped deal with Hertz Global hasn’t actually been signed yet. 

The Week Ahead

The market’s focus for much of this week will be on a few key events. First, the FOMC is starting its two-day meeting today, the culmination of which will be a statement and possibly some additional clarity regarding both bond purchase taper timelines and the Fed’s thoughts concerning inflation.

Other big and potentially market-moving news items to look for in the coming days come in the form of legislation. After weeks of wrestling with the details, both the bipartisan infrastructure bill and the $1.75 trillion reconciliation package may be voted on later this week. 

And, of course, there will be more earnings. The almost daily parade of earnings has impacted the markets over the past month, but earnings season is starting to wind down. So far, 23 of the 30 companies in the Dow have reported earnings in October. Still, November will see prominent names such as Disney DIS, Home Depot HD, and Walmart WMT report.

Health Care Stocks in Focus

A couple of health care stocks are in focus today. First off, as mentioned above, Pfizer a company front and center since the pandemic began, released earnings this morning.  

After the market closes, Amgen AMGN is set to release. Amgen, unlike Pfizer, is a company that isn’t currently involved in COVID-19 drug manufacture, but it is a large ($120 billion market cap) biotechnology company, an industry group that has had an ever-increasing role in the health care sector.  

Despite the high visibility of health care and health care stocks this year, the sector has not kept up with the S&P 500 (SPX). The sector is up 18% this year, as compared to 24% for the SPX. It has also underperformed since the pandemic began. This goes to show that news related to a sector or a specific company doesn’t always translate into great stock performance. Of course, some individual stocks have benefitted greatly from the pandemic, Moderna MRNA being one of them. We’ll see how that translates to its earnings results as the company reports this Thursday. 

CHART OF THE DAY: HEALTH CARE IN FOCUS. The Health Care Sector ($SP500#35—candlesticks) is up 18% year-to-date, but that doesn’t tell the whole story. The Biotechnology Industry ($SP500#352010—pink) is significantly underperforming the sector, while the Pharmaceutical Industry ($SP500#352020—green) is slightly underperforming. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Covid Optimism: There is some good news on the COVID-19 front. According to Johns Hopkins University data, cases have declined around 60% from the mid-September Delta-variant-case peak. Still, there is concern that rates of infection could jump back up heading into winter. I don’t know the future course of the pandemic, but changes in hospitalization rates, vaccination rates, and the government’s response to the pandemic certainly can affect the economy, the financial markets, and of course, the health care sector. 

In the Government’s Hands: Speaking of governmental action, according to The Wall Street Journal, lawmakers are still at odds as to whether a deal can be made that could enable Medicare to negotiate with pharmaceutical companies on drug prices, even though President Biden decided to leave that provision out of the most recent version of the social-spending and climate package. This is an example of the type of legislation that can affect the health care sector, especially pharmaceutical companies. The S&P 500 pharmaceutical industry is up more than 14% year-to-date, slightly underperforming the health care sector as a whole. Of late, however, pharmaceuticals have strengthened, up around 6% since the October 13 low. 

New Frontiers: Many investors interested in the health care space consider the biotechnology industry to be the “wild west.” It has a well-deserved reputation for volatility, but also excitement associated with innovative technology, and in our pandemic-stricken world, real-life applications have come to the forefront. You don’t have to understand the intricacies of mRNA technology to see its impact. 

Investors in biotechnology need to be cautious, however. One of the reasons for the aforementioned reputation in the biotech industry is the difficulty in getting its products to market. According to an article I recently read on forbes.com, less than 10% of products that have entered clinical trials will ever receive approval. These types of hit-and-miss success rates translate to increased risk in exchange for heightened potential rewards in the marketplace. 

For all the promise of biotech, however, the industry has disappointed this year, up only 5.6% year-to-date. Could this industry reverse direction and outperform in 2022? The answer is “yes,” but that will partially depend on earnings strength from not just companies like Moderna and BioNTech BNTX that have produced Covid-19 vaccines, but also on other large biotech companies such as Abbvie ABBV, Gilead Sciences GILD, Regeneron Pharmaceuticals REGN, and Biogen BIIB.

Image by x3 from Pixabay

TD Ameritrade® commentary for educational purposes only. Member SIPC.