Themes That Are Dying in 2014

 | Mar 31, 2014 | 6:45 AM EDT
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Have we lost some of the most powerful themes of 2013 in the last few weeks? With some crosscurrent selloffs occurring even as the S&P 500 marches higher, it's certainly a reasonable question to ask. So let me tick down some winners-turned-losers and opine on their deaths, premature or otherwise.

The first disappearing theme is aerospace. Ever since Boeing's (BA) last quarter, this group has simply given up the ghost. Any time there is an uplift of any kind, sellers materialize and throw the group back down.

How did this happen? It's because, somehow, out of nowhere, a perception has developed that there is an inventory glut. This perception lurked in the Boeing earnings call, but I thought it was refuted. It came up in the Alcoa (AA) call, and with Alcoa producing 2 million fasteners per plane, there's a real interest here. The company did admit there was some sort of inventory glitch, but it also said this would be resolved quickly -- and I think it has been.

Frankly, it is inconceivable to me that there is anything more than a short-term, anomalous blip here. That's because, first, the airlines are flush and, second, oil is still priced high -- which means the airlines still need fuel-efficient planes. I think Boeing's stock is resting and that the group will take off after the company reports.

Second theme: software-as-a-service cloud plays. I think this theme is a tremendous one, because companies that can allow managers to keep track of everything in their business on their handheld is clearly the way of the future. There is no doubt about that. But this theme doesn't do well in a moment when, say, a company such as Hewlett-Packard (HPQ), which has fired tens of thousands of people, suddenly catches a revenue uptick that flows right to the bottom line. An earnings-and-revenue surprise of greater magnitude than expected is always going to be worth more than just a revenue surprise that isn't all that surprising to those who follow the group.

That's especially so when there are now so many companies in that group. It's one thing when you have a handful of companies with tremendous revenue growth vying for attention. It's another when you have maybe 25, which is about how many software-as-a-service companies are now out there because of this gigantic wave of initial public offerings. There are too many companies, and not enough dollars to chase them.

Then there's biotech. Here's a group that had been dominated by Amgen (AMGN), Celgene (CELG), Biogen Idec (BIIB), Gilead (GILD) and Regeneron (REGN). You can throw in names like BioMarin (BMRN) or Vertex (VRTX) or Pharmacyclics (PCYC). This was the most important leadership group in the market. It was brought on by, one, a number of big drug approvals and, two, some super-mergers that seemed to be happening pretty much once a month.

While the approvals are still occurring, the biggest one -- that of Gilead's hepatitis C pill -- so far seems below forecast, and that's crimping the whole group. Given the size of the patient population, and the life-saving nature of the pill, I do not know why sales haven't been better. Each week they seem to get worse, which is, I believe the proximate cause for the whole group's decline, as they are all linked via powerful ETFs. As they've gone down, no safety net of mergers and acquisitions has appeared to save the group.

At the same time, the sheer number of new biotech stocks has been overwhelming. Plus, many left-for-dead biotechs, which had been the equivalent of penny stocks, have had new life breathed into them. I wish I could say it was justified. But it's usually just another sign of rank speculation. Let's not forget that the group always, always, always underperforms when a pronounced economic growth spurt is in the air, and that's just what people think we are having now.

So aerospace, cloud and biotech all have issues that cannot be solved quickly. The first might turn when we get earnings reports. The second and third, though, can only stop declining if the IPO window closes and the economy falters -- and, in the case of biotech, we'd need to see a pick-up in Gilead's new drug sales and a new wave of M&A to take advantage of the decline in prices.

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