When does the hatred of the drug stocks get to the point where it can bring down the whole market?
I think that's what today's action is saying.
There are many sectors that matter to a market, sectors that can take down everything if the declines are violent enough.
At times, we have seen the banks clobber the market as they are the largest segment in the S&P. We've seen tech take down the market and for years we were hostage to tech given its size in the S&P.
We have seen the industrials sandblast the market even as they are often just plays on China; when China's economy is strong, they do well, and when it is weak, they do terribly. Fact of life, but too many have had their numbers cut because of Chinese concerns. That's how powerful the second-largest economy can be for certain international companies based in China. The decline in Europe has set them back at times, too.
But this move in health care takes your breath away and it is taking the wind out of the sales of much of the market because it shows you that one of the great leaders of this period -- medicine, with biotech in particular -- has become by far the worst-performing sector, and the illness to the stocks is no longer restricted to just the highest-growth members of the cohort.
We tend to want to believe this group began to roll over when we heard about how there was price gouging in the industry. In truth, though, the big downturn started when many of the development-stage companies with no earnings began to get toppy, with a combination of underwriting fatigue -- too many IPOs -- and secondaries walloping the most wildly speculative portion of the group.
But the decline extended when a former hedge fund manager and drug company exec openly bragged on air and just about everywhere else that he was putting through gigantic price increases for old drugs simply because the market would bear the gouging.
We know there are drugs that cost a lot of money and are produced for a small group of people suffering from rare diseases, the class we call orphan drugs. These are often alternatives either to death or to a form of lifetime maintenance that costs so much that even the highest of prices is cheaper for the providers.
However, this issue, which started with the outrageous behavior of one ne'er-do-well, has brought a level of political wrath that's spread from those companies that raise prices on old drugs because they can -- even as they aren't even specialty drugs but just happen to not have active generic competition -- to companies that make drugs and raise prices for those drugs regularly.
Now, is the challenge for real? Will these companies not be able to put through these increases? I think there will be some that can't but that we are in a "when the smoke clears" situation where not only is it not clearing, it is spreading to other portions of the health care economy. We saw the roll-up drug stock companies get hit after the initial political riposte. Then the biotechs got whacked off the price increases. Now it is the mainstream companies, Eli Lilly (LLY), Bristol Myers (BMY) and even the companies dedicated to keeping costs down like the wholesalers, that are getting obliterated. They've even gotten to the drugstore chains.
Now, everything has a precipitating event. We know that ever since putative Democratic nominee Hillary Clinton came out against drug-price gouging, not really recognizing the gradations and subtleties of the industry, it's been soft.
But today we saw a shortfall in a company called Illumina (ILMN), which makes gene sequencing equipment, with that stock giving up 14% in one day. You could argue that its weak orders in Europe could be extending to biotech, but that's a stretch. In this market, though, the bear has morphed into a health care annihilator -- remember it is a roving bear market taking apart sector after sector -- and it's using any excuse to bring the hammer down on biotech. Two back-to-back very negative articles about endless price increases -- a one-two punch from The New York Times and The Wall Street Journal -- sure aren't helping.
Drug stock owners also got a rude awakening from Exact Sciences (EXAS), which found out that something called the U.S. Preventive Services Task Force questioned the benefits of its colon-cancer test. That stock at one point lost half its value and is now down 45% in one day and 63% for the year. Many thought the Exact Sciences test, which basically allowed doctors to make a judgment by looking at your excrement as opposed to a time-consuming colonoscopy, would be welcomed as a way to save the system money and get people to take some action to avert this terrible disease. That's not panning out, though.
Still, the idea that this downdraft should have legs even to the companies that contain costs -- here I am thinking of the formerly bulletproof McKesson (MCK) and AmerisourceBergen (ABC), of the health maintenance organizations or the old-line drug companies -- is getting a little absurd. This kind of selling is just way overdone and smacks of just wholesale liquidation of anything that has higher growth than other cohorts.
Plus, as I always say when I play "Am I Diversified?" often the highest-growth stocks trade together. That could be why we see a spillover into Chipotle (CMG), which is the highest growth in the restaurant business. Or we see it in the most robust portion of the semiconductors, the Avagos (AVGO), NXPIs (NXPI) and Skyworks Solutions (SWKS), the latter being a total travesty, frankly, given that it preannounced a higher-than-expected quarter today of its very smart acquisition of PMC Sierra (PMCS), a tech storage and optical company, to broaden its reach from just cellphones to the enterprise. (Skyworks Solutions is part of TheStreet's Growth Seeker portfolio.)
Instead the money's flowing to the lowest-multiple stocks in tech, old tech like Intel (INTC) or Microsoft (MSFT) or Cisco (CSCO), the stocks that really haven't moved and have been building solid bases. It's a nascent move but has picked up steam ever since Western Digital (WDC) caught a buyer of 15% of the company's shares at a dramatically higher price than it had been trading and Micron (MU) failed to go down after still one more disappointing quarter. (Cisco is part of TheStreet's Action Alerts PLUS portfolio.)
I have long held that growth is the magic elixir behind the best stocks. But I have also seen the best stocks swoon and swoon for some time, particularly after big runs. Sometimes it is self-fulfilling, as in the overwhelming supply of biotech deals that have sopped up a lot of excess cash. Sometimes it is part of a broader sea change into cheaper stocks or more cyclical stocks, of which this rotation has some of the characteristics. Sometimes it is part of larger redemption run against managers who own these stocks and need to raise cash. And sometimes it's because the charts are real bad and show gigantic head-and-shoulders rollovers that can't be stemmed at this point.
This move has all four going against it. Who wants to get in front of one speeding locomotive, let alone four of them? And believe me, nobody is going to stop and say what TG Therapeutics (TGTX) CEO Mike Weiss said last night on Mad Money, that the system is willing to pay a high price for drugs that allow people to live longer, better lives. It's just too easy to demonize the drug stocks in an election season.
But let's do this. Let's accept that this is a squall and nothing more. That doesn't mean it can't do damage, particularly to the charts. It doesn't mean you will make money if you step in right here. You might get run over multiple times. Yet, every time I have ever seen one of these, the stocks do get to levels that are absurdly cheap vs. their growth rates, and you have to act.
I believe we are real close, if not there already.