Spinning My Wheels

After a very good start to the year I have been spinning my wheels since March. The main culprit has been the fact that my core longs have been in healthcare and the sector has absolutely stunk up the joint. I have had some good trades during that time like shorting Citigroup but all it has done is negate the damage that my core longs have inflicted.

My thesis on pharma/biotech stocks were that many were so cheap that even if they never came up with another drug, the current price of the stocks was still too low. As an example, a Citigroup analyst came up with a $70 discounted cash flow valuation on Amgen assuming they never find another successful drug.

Then I heard news that Greece and Spain decided they were going to pay drug/biotech companies over 20% less for their drugs.  Even with that news the stocks are cheap as the earnings effect is marginal. But if their customers can come to them any day and say we are paying you less then who is to say it won't keep happening. Right now the US can run a 10% deficit but the bond market might not allow that forever. The bottom line is that the stocks are still probably too cheap but I can wake up one day and find out that their customers decided to pay them less and all my earnings estimates were wrong.

I cleared my portfolio of healthcare stocks yesterday as I just cannot live with that type of uncertainty. I am bearish on the economy and it has been difficult for me to find  reasonable valuations in non economically sensitive stocks other than in healthcare.  I will double up on research and hopefully be able to identify other longer term opportunities. Until then everything is a trade.


PJ said...

Well, I think you have to be net short in this environment, since the declining economy will crush stock market valuations.

Since you like to have both longs and shorts, I'm not sure why you gave up on health care instead of shorting more economically sensitive sectors, like reits or retail.

When the economic decline is apparent, people will rotate to high-yielding defensive sectors. I would think the health care reform news is in the stocks, but the economic decline is not.

On the other hand, long term I'm not too optimistic about health care. Aside from political control, there's the issue that most drugs don't work well. Dietary manipulations work much better in most illnesses; the drugs that really work, like antibiotics, are cheap. If health care gets expensive people may find they can do just about as well without it.

Anonymous said...

Exactly. It is the supply and demand approach which has worked best. C, Brkb, and V over the past 6 months have been the sturdy winners. My stock picking has depended upon timing.

Do you have plans to play C on the way up? The gov't will not sell C from the end of this 1.5 billion share batch until Aug 1st.

Anonymous said...

markets are oversold and i'm expecting a trade able rally, into the middle of next week.

good luck

Tsachy Mishal said...

Health care was showing the best supply/demand characteristics of any sector. There were the most buybacks and cash takeovers of any other sector. Historically that has led to outperformance.

Tsachy Mishal said...

The government said they want to be out of Citi by year end. If they wait until August to sell the next batch they will not be on track to do so. Why do you think the next batch will be in august?

Anonymous said...

My gut says we double dip this recession. I'm predicting the dow in the mid 8000 range by august.

Anonymous said...

I think the fact that health care stocks are so neglected and hated means that the patient will eventually be rewarded. Another idea: Visa and Mastercard have sold off to an irrational extent. The Durbin amendment, which might still be rejected by the House, probably won't hurt them much.

Anonymous said...

I read the Citi Aug 1st info somewhere, but in retrospect, a place of questionable reliability. Let's follow this and see if it is confirmed somewhere else.

C looks close to a bottom already, however.