These stocks are red hot. They are levitating. It's the best group out there. And then you get the tweet, the presidential tweet that wrecks everything. Or does it?
We came in today not expecting much of the session. We have little news, few earnings, it's almost placid. Then we got the lightning bolt from @realDonaldTrump: "I am working on a new system where there will be competition in the drug industry. Pricing for the American people will come way down."
What do you do? Do you:
- Panic and sell everything?
- Wait to see what happens?
- Buy the selloff?
The answer, drum roll please ... C, you buy the weakness.
Why would you take the other side of the trade of the president of the United States of America?
First, this isn't the first time he has trashed the industry. He campaigned against the drug companies hard in the winter and spring of last year and then he reiterated that view in his Man of the Year interview for Time Magazine.
Second, the drug companies are incredibly powerful in Washington. They have systematically frustrated any attempts by the government to restrain pricing. Only a single-payer system where the government mandates pricing and drug makers have no choice but to bow down or be kicked out of the Medicare system can truly provide lower prices. If there were two drugs, the government could pit them against each other and buy the one with the lower offer and cut the other out. In that sense, the government would basically be determining prices.
This has long been a dream of some of the most powerful Democrats and one that the Republicans have called an anathema to everything they believe in. This is not a deregulation issue. It is congressional and I am telling you right now that Trump will not have his way on this issue. One of the biggest losers would be Eli Lilly (LLY) and I simply do not believe the former governor of Indiana who is so close to the company, Vice President Pence, would just sit there and let this happen, either. It's almost inconceivable. Yes, when there are two drugs that seem very similar, like Regeneron's (REGN) anti-cholesterol drug and Amgen's (AMGN) similar drug, then there could be a negotiated price. But those are actually quite rare these days.
So why buy them? Because every time the president has singled out an industry or a company to make a deal, the sector and the single stock get hammered and you have to hold your nose and buy.
You disagree? Look at Boeing (BA) . Thirty points ago, Trump laid into the maker of Air Force One. That was your last chance to buy. The president's riposte against Lockheed Martin (LMT) gave you a dip that allowed you to get a $19 point gain. The president brought General Motors (GM) stock down to $34 over the Chevy Cruze fracas. What a terrific buy that was. (Lockheed Martin is part of TheStreet's Dividend Stock Advisor portfolio.)
I am not being glib about this. It's just that it's a lot harder for the president to negotiate a whole system of prices than it is to berate an individual company because Congress is such a great defender of so many companies that feed at the trough of the feds. Anyone who remembers the fights Bill Clinton had against the drug companies, the fights that so many Democratic members of Congress have had against higher prices, knows these battles can't be won.
And maybe they shouldn't be. Our drug industry is by far the best in the world. If I were the president, I would be going after other countries for routinely ripping off our drug companies by jamming them with lower prices, which causes them to charge more here.
You want to lower drug prices here? You go after every country that squeezes the profits out of our companies knowing that there's no cost to it because those companies make them in the U.S. It's the classic case of our trading partners screwing us with no president ever standing up for our interests. That's how you would get prices down.
Regardless, what matters the most is that this group has been red hot and there's been no chance to get in at any price break. They have been horses and it's been impossible to get on them. I like Merck (MRK) for its Keytruda anti-cancer franchise. Lilly's got a fabulous diabetes pipeline. Pfizer's (PFE) willing to bring out value with some self-help. Allergan's (AGN) the cheapest large-capitalization growth company of all, one that has been pancaked because of its failed merger with Pfizer and hasn't gotten anywhere near back to where it was even as its earnings estimates are moving up. And if you want competition, the company that can create the most competition is Mylan Labs (MYL) , which sells at 7x next year's earnings. You really fear that the president finds a way to create competition? Go with Mylan. (Allergan is part of TheStreet's Action Alerts PLUS portfolio.)
I am not dissing the president here. I think he's right to try to get drug prices down. I am just suggesting a better way, which is to go after the free riders around the globe in return for lower prices here.
Once again, I want to explain that you don't buy stocks because of anything that the president needs Congress for. While I totally agree that with Republican majorities in both houses, the president should be able to get his way. But we don't know what his way is. Are we going to have a border tax knowing that it is going to jack up the prices of retail goods, hurting his constituency in a disproportionate way? Is that what he's going to check off on? But without some offsetting tax, there is no way he is going to negotiate lower tax rates. Many of the Republicans have sworn they will do nothing to raise the debt ceiling. Are these people who are willing to cut taxes to make it even less likely we balance the budget?
Do we think that repealing and replacing something as complicated as the health care system, which took forever to design, will just sail through? We don't even know what's sailing, for heaven's sakes. The stocks that are going up in health care, everything from the insurers to the hospitals to the critical-care facilities, can't all be right. If there's a real compromise, there will be real losers. Right now, the stocks are saying there won't be any.
My take is that the only real power the president has at this moment is to deregulate, and he's using that power with a vengeance whether it be for autos or airlines or banks or oil companies. It's all coming together for these companies and they are going to stay winners.
I prefer to keep finding companies that are fitting broad themes, including those levered to worldwide growth. But if I can find some stocks I like but have roared higher and they get dinged by some tweets, which often produce strong gains down the road for their targets? Count me in. Count me as a buyer.
