The intensely debated health care legislation has become law.
Traders now speculate on how the bill impacts the health care
sector. Of the winners and losers, the pharmaceutical companies
have come out near the top. Over several years, they will pay $90
billion to help offset the costs of health care reform. But in
return, they'll see huge benefits, including a huge influx of new
This is because roughly 32 million new people will now be able to
pay for prescription medications through insurance coverage. And,
numerous seniors will be able to use Medicare to fill prescriptions
that were too costly in the past.
Lucrative biotech drugs -- which are more costly for companies to
develop because they are made from living cells instead of
chemicals -- have been granted 12 competition-free years. This is a
huge victory for the biotech industry against the generic drug
makers, which had been pushing for seven years. The result should
translate into higher profit margins for biotech firms.
These are just some of the reasons I like the
SPDR S&P Pharmaceuticals (
exchange-traded fund (
The ETF contains 25 pharmaceutical companies. About 70% of the
companies in this fund are mid- and small-cap stocks. Top holdings
are giants like
Johnson & Johnson (
, but it also includes smaller companies like
Perrigo (Nasdaq: PRGO)
Impax Laboratories (Nasdaq: IPXL)
Valeant Pharmaceuticals (
. The fund has a net asset value of nearly $90 million.
XPH seeks to replicate the performance of the S&P
Pharmaceuticals Select Industry Index . Fundamentally, it is in
line with the index . Both XPH and the index have a forward one
year price to earnings (P/E) ratio of 13.2, both have an estimated
three to five year earnings per share (
) growth rate of +16.4%.
But where XPH really shines is in its technical signals.
As the chart below shows, XPH is on a tear. It has been on a steady
uptrend since hitting a low of $23.35 in March 2009. From this low,
it has gained more than +80% to date.
- At the beginning of March 2010, XPH shot past resistance near
$40 on high volume. Currently at $41.97, XPH is near its highest
point since inception in June 2006. The fund remains well above
trendline support, which is just below $40.
- XPH is above its rising 10- and 30-week moving average;
because of the December 2009 to February 2010 consolidation, it
is not over-extended.
- The indicators confirm the positive trend. MACD has just
given a buy signal. The MACD histogram is expanding into positive
- The relative strength index (
) has been on a steady uptrend since October 2009. Although RSI
shows the ETF is overbought, strong securities can remain
overbought for extended periods of time.
- Stochastics confirms that XPH is overbought. However, it
remains on a buy signal, giving further credence to the fact that
strong securities can remain overbought for long periods.
With no resistance in sight, this security can soar. I am
setting my target at $49.95, just below the round resistance number
of $50. My stop-loss is $36.25 -- below trendline support and the
December to February consolidation.
Action to Take
: Based on the analysis above, here's how I plan to trade XPH:
- Purchase XPH on Monday, March 29th
- Set the stop loss at $36.25
- Target price = $49.95
- Potential Profit =
Disclosure: Melvin Pasternak does not own shares of any security
mentioned in this article.