The current market conditions could bode well for drug stocks into the coming quarters should corrections continue.
Shares of Stock of the Day Pfizer (PFE) , Merck (MRK) , GlaxoSmithKline (GSK) , Amgen (AMGN) , Johnson & Johnson (JNJ) , and Eli Lilly (LLY) all finished Monday's trading on a high note in the face of a drooping Dow Industrial Average and a plummeting NASDAQ 100.
"The market is telling us what we already know, people are scared of a recession and an escalating trade war and are therefore positioning more defensively," Action Alerts Plus analyst Zev Fima told Real Money. "People don't want to pay up for the high multiple when the cost of money is going up with Fed rate hikes and global growth possibly slowing."
The multiples assigned to many high-growth tech names is adding to selloffs as market fears foment as well.
As such, a forward-looking PE ratio of 14 assigned to a company like Pfizer becomes much more attractive than the 505 PE ratio assigned to cloud darling Twilio (TWLO) , which has marked a nearly 14% slide amid Monday's tech selloff.
Downside Demand Protection
The companies will also be buoyed because of the inelastic demand for their products.
Real Money contributor James "Rev Shark" DePorre noted this factor in his take on the stocks in his column this morning.
"In the midst of this ugly action there is one sector that is performing well. Pharmaceuticals are viewed as a safe haven because demand for drugs is typically unaffected by the economy," he wrote. "In addition, the group is well known as a safe haven and that makes it self-fulfilling to some extent."
It becomes common sense. Sick people will always need to take their medicine.
According to a study from the University of Utrecht and the World Health Organization, the pharmaceutical industry is one of the least affected industries in recession conditions.
"Although the economic recession [of 2008] affected many countries, only a few showed a substantial decline in pharmaceutical consumption," the study concluded. "The South East Asian region had the biggest increase in pharmaceutical consumption (+28% in Q4 09) and the American region had the smallest increase (+12% in Q4 09)."
Only high income, European countries showed marked decreases amid the economic downturn.
To be sure, a potential price crackdown in response to moves like Pfizer's choice to raise prices on Friday could throw the recession-proof thesis into a tizzy.
Until that comes, the port-in-a-storm status of pharmaceutical stocks is likely to remain steadfast.
