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.