These are a few ideas as investors factor in a new political and market environment and await more concrete direction on key agenda items for the incoming administration.
It was a wild and wooly week for investors. The unexpected election of Donald Trump as well as a “clean sweep” for Republicans shocked the vast majority of pundits and forecasters. The reaction in the stock markets were also the exact opposite of what was predicted in the unlikely event that “The Donald” became the 45th president of the United States as the Dow and other major indices hit all-time highs.
The unexpected rally was triggered by a massive sector rotation within equities. Sectors like Energy and Financials that bore the brunt of the significant increases in regulations and legislation over past several years, staged nice rises. Major banks rallied strongly on the prospects of the repeal of Dodd-Frank, which has shackled growth in bank lending and other areas.
Construction and Infrastructure stocks were also strong on the prospect of increased infrastructure spending as it was one of few items both parties seem to agree on. Leading construction equipment leasing giant, United Rentals (NYSE: URI), picked up 20% on the week, but is still reasonably priced at approximately 11 times earnings. No sector benefitted more this week than the beaten down biotech sector, which rose over 10% on the week, including a massive nine percent rally on Wednesday. The specter of the likes of Elizabeth Warren and Bernie Sanders imposing price controls from their perches in the Senate faded in an overwhelmingly “red” wave this election.
There were also some post-election losers where investors got caught leaning the wrong way. Hospital stocks got crushed as the prospect of the repeal and replacement of the Affordable Care Act with a more free market focused alternative, got factored into the market. Alternative energy plays like Tesla (NASDAQ: TSLA), that rely on taxpayer credits and subsidies also had a tough week.
It is still early to speculate what a Donald Trump presidency will mean. Cabinet positions need to be filled, a new Congress needs to be seated in January, we still have lame duck actions by the outgoing administration and Congress to consider, and key priorities of the new administration need to be set. However, there are a few sectors that should clearly benefit from a change of government and should do well in the quarters ahead.
Financials should benefit from the roll back of Dodd-Frank as well as other regulations. We also could possibly see a rise of interest rates after seven years of the weakest post-war recovery on record. This will benefit banks and a host of other financial sectors such as insurers. I like consumer financial services play, Synchrony Financial (NYSE: SYF) here. The provider of private label credit cards and other consumer-focused financial products should do well in this environment. Revenues should grow in the high single digits in 2017 and earnings should rise 10% to 15%. At just over 10 times next year’s earnings, the stock is not expensive, and the shares also pay a small dividend yield.
The other sector that an investor has to like here is biotech. Even with this week’s rally, biotech is down more than 25% from its last peak in the summer of 2015. Donald Trump has also mentioned FDA reform as one focus area of the new administration, which could result in faster drug approval. In addition, now that we have certainty from the election, I think M&A activity should substantially pick up in the months ahead. Financing rates remain low and drug and biotech giants still need to replenish their pipelines and have huge free cash flows to make purchases. In addition, a “tax holiday” that helps liberate some of the over $2 trillion that American multinationals have tucked in overseas operations could boost activity as many drug giants have substantial amounts of cash outside the United States.
Acadia Pharmaceuticals (NASDAQ: ACAD) has moved up nicely this week. Its recently approved drug, Nuplazid, showed better than expected initial sales in its recent quarterly report. The drug is approved for the psychosis present in 40% of the Parkinson’s population which is estimated to be a $1 billion indication. The drug just entered Phase III testing for the same symptoms in patients with Schizophrenia. Acadia is frequently mentioned as a buyout target, as the Baker Bros. own over 20% of the firm and their usual modus operandi is to push for a sale to a larger firm with a substantial premium.
I also like Progenics Pharmaceuticals (NASDAQ: PGNX), which has been profiled many times on these pages. The approval of the oral version of relistor on July 19th by the FDA has already showed up in enhanced sales in that franchise. The company just raised $50 million against royalties against that compound to fully fund development of Azedra and 1404, both promising drugs in its pipeline. In addition, Valeant Pharmaceuticals (NYSE: VRX), which owns the marketing and distribution rights to relistor, is talking to Takeda to sell its gastrointestinal assets including relistor to raise funds to pare down debt. If this deal goes through, which is likely, it will remove the “Valeant” discount on Progenics. This will make this small biopharma a more probably buyout target.
Since the election, the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) has rocketed up to an impressive 10% gain. That’s far ahead of the 1.5% rise by the broad market benchmark S&P 500 over the same period.
Having invested successfully in the biotech sector for over two decades now, I can say with confidence that the oversold levels we’ve had in this sector won’t last for much longer and the growth story for biotech has just begun.
Just in my Biotech Gems advisory, we saw two stocks shoot up over 50% and three more 20% and higher. These gains are only just the beginning as the market digests what positive effects a Republican government will have on the sector.
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Positions: Long ACAD, PGNX, SYF, URI