This commentary previously appeared on Real Money Pro on Oct. 26, 2015, at 11 a.m. ET. Click here to learn about this dynamic market information service for active traders.
I am going to be bold to start this week and say that I believe the biotech sector has bottomed after recently entering bear market territory officially. There are myriad reasons for this.
First, the average bear market in biotech has lasted a little less than three months from peak to trough over the last decade or so; it is at this point now.
Second, the pharma plays had a roller-coaster ride last week in sympathy, due to the surge of volatility of the stock in drug giant Valeant Pharmaceuticals (VRX). To give but one example, the action in Horizon Pharma (HZNP) was just spectacular. The stock gave up more than 40% in the first four trading sessions of the week, just to pop back above 30% in trading Friday alone. This is the type of action usually seen in a capitulation phase.
In addition, a lot of funds' fiscal years end at in October. This should cause an ebb to "tax loss" selling in the sector. I don't have a good feel for how much of the recent turbulence was caused by this factor, but I would bet it hasn't been insignificant.
Most important, we see earnings from major biotech and pharma concerns this week. Merck (MRK) kicks off the earnings action Monday when it delivers quarterly results. This will be followed Tuesday with reports from Gilead Sciences (GILD), Pfizer (PFE) and Bristol-Myers Squibb (BMY), with biotech pioneer Amgen (AMGN) providing its quarterly update on Wednesday.
Forgotten during these challenging months is that the health care sector should provide the best year-over-year earnings growth of any of the 10 major industry groups in the S&P 500 once again this quarter. I expect these reports to largely beat the consensus, as is the historical norm.
These results should provide a much-needed counterbalance to some of the election-driven rhetoric around drug price "gouging" that has driven the stocks of many names in these sectors down in recent weeks. Yes, there are some bad actors in the industry. Given what I have seen on Valeant in various reports, it definitely looks like it belongs in that category. But the big players listed above hardly deserve to reside in the same neighborhood of that serial acquirer and drug price-raiser.
In addition, the stocks listed above that report this week have solid balance sheets, which Valeant can hardly claim, with more than $30 billion in net debt it has taken on to continue to buy companies. They also pay good dividends, have solid pipelines and represent one of the few areas I am still finding value given their growth prospects and valuations in the current market. Maybe after these earnings come in, investors can again focus on those factors and ignore the temporary issues that have knocked these issues down.
