Pharmacies Offer One Bright Spot in a Market that Looks Under Pressure

If you have been reading my ramblings over the last couple of days, you will be aware that I am not my usual sunny, optimistic self at the moment. It is not that I don’t believe in the U.S. economic recovery; there is no doubt that unemployment is falling, wages are rising and that GDP growth remains positive.

The problem is that all of these things are happening quite slowly and other events seem to be conspiring to put pressure on stocks. European QE will divert investment away from the U.S. and add to the pressures of a higher dollar, oil’s continued decline has snuffed out one significant area of growth, and the consumer still seems to be running scared. All of those factors contributed to an earnings season that could be best described as so-so, hence my fear of a correction. That doesn’t mean, however, that there are no opportunities.

My natural inclination at times like this is to look for the contrarian trade, but the most obvious of those, in energy, is just not ready to trade. Fundamental factors point to oil moving lower still; it is just too soon to look for bargains. One of the other big losers over the last couple of months, however, the healthcare sector, does offer some opportunities even if the general market remains weak.

As the chart above for the SPDR Heath Care Sector Select ETF (XLV) shows, while the sector as a whole has bounced off of the lows from the end of September there is still ground to make up from before that drop, and the sector is roughly flat on the year.

A case could be made, therefore, for the ETF as a long term investment, but any future growth is most likely to come from the biotech sector more than traditional channels. It is, however, hard to find any real bargains without significant risk there, as some assumptions about pricing in that sector look to have been off the mark. So, if new drugs such as the PCSK9 inhibitors are growth areas but their effect on the drug companies looks to be fully priced in at best, where does that leave us?

The beneficiaries of that scenario will be the pharmacies. The health systems and insurers will negotiate lower pricing, but still face a whole new generation of drugs adding to their costs. The pharmacies, on the other hand, can maintain margins with price reductions while still benefitting from increased prescriptions. That is why any combination of the big three U.S. pharmacies in terms of prescriptions filled, Walgreens Boots Alliance (WBA), CVS Health (CVS) and Rite Aid (RAD) offer the best opportunities in the sector.

Even though I remain somewhat pessimistic for the overall market in the next month or two, there is always a silver lining to be found somewhere. In this case, averaging into pharmacy stocks over the next few weeks looks like a solid play in anticipation of some nice returns next year.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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