The four horsemen of the semiconductors and the four horsemen of biotech are standing their ground, and it could bode well for a stand in two leadership groups that have been hammered, and were the proximate causes of this week's decline.
Exactly one week ago today proved to be the peak in biotech, as overenthusiasm for the group crested and a rapid selloff began. What caused that top? We had seen an unprecedented wave of mergers and acquisitions, culminating with a monster bid for Pharmacyclics (PCYC) by a conservative company, AbbVie (ABBV), which left two other big drug companies, rumored to be Johnson & Johnson (JNJ) and Pfizer (PFE), at the altar, ready to do a big deal. We had gotten some amazing results out of a new class of anti-bad cholesterol drugs from Amgen (AMGN) and Regeneron (REGN). Plus, Biogen (BIIB) released positive results of its study of a formulation that could roll back Alzheimer's disease, a potential $15 billion blockbuster drug.
That got the group overheated and lots of smaller, non-profitable techs were taken up in the wake of this terrific news flow. Fortunately, the overheated companies didn't issue a lot of equity, and while a bubble of sorts has certainly become evident among a lot of small companies with Phase 1 and 2 formulations that may never pan out, the ability of the four horsemen to rally today after that smack-down is a very positive sign. It doesn't hurt either that BioMarin (BMRN) is running on takeover talk. Nothing like a little M&A action -- real or not -- to get the shorts' juices flowing.
Is there a bottom in the group? How about a needed shakeout running its course?
We had a parallel crushing of the best of the semiconductors, the ones with the most proprietary content linked to cellphones and connectivity, notably Skyworks Solutions (SWKS), Avago (AVGO), Qorvo (QRVO) and NXP Semiconductors (NXPI). There's been carnage for months in the semi space, including real bloodletting in Intel (INTC), Micron (MU) and Qualcomm (QCOM). The problems here? Intel and Micron, which reports next week, are seen as too linked to personal computers, which are in secular decline. They don't have the leverage to connectivity that the new big four have. Qualcomm's core cellphone business seems to be slowing along with some real complications in its business in China.
We thought the pain was cordoned off to those three. But earlier this week we got negative comments from Taiwan Semiconductor (TSM) -- a mostly ignored behemoth -- that there's inventory in the cellphone channel. Inventory is the bane of the existence of these parts companies and those comments sent all the traders scurrying away from all stocks in the group, not just those geared toward personal computers.
Into that breach steps David Aldrich, CEO of Skyworks, arguably the best of the lot, who gave you terrific reassurance on Mad Money last night that things are very much on course and as red-hot as ever. The new cellphones are so complicated and have so many proprietary parts that the gross margins for these companies are actually going higher -- quite a difference from the old days. Skyworks has about $5 of content in a new Apple (AAPL) phone, which means that their business has tremendous momentum. Plus, Aldrich made it clear that the trend is long term. He likes to say he is "following the money," plying his chips into all sorts of connected applications in cars, homes, medicine and defense, among many other sectors.
Again, I came away thinking that these stocks, too, can bottom and the problem children in the group each have their own issues that don't bleed into the territory of the four tech horsemen.
The leadership in semis and the leadership in biotechs are asserting themselves in ways that say weak hands are exiting. That's precisely what must happen if these two groups are to power beyond the highs reached within the past week. After today, you can't help but feel better about both groups, which looked like they were on the ropes just a few short days ago.
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