Strong Earnings from Gilead Overlooked by the Market
The downturn in the market that has marked the start of 2016 so far continued in the week just ended. The rotation out of high-risk assets continued except for in materials as many commodities got a bid this week. The Materials sector was one of the very few up on the week. However, this feels more like a dead cat bounce than something I would chase given the dismal state of the global economy.
This week the sell-off we have seen throughout the New Year hit the momentum stocks in technology with LinkedIn (NASDAQ: LNKD) getting crushed after a poor earnings report and tepid guidance. The so-called FANG (Facebook, Amazon, Netflix, Google) stocks that were the main source of outperformance in the market in 2015 really took in on the chin with both Amazon (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) declining some 15%.
As one might expect given the volatility in the overall market which saw the NASDAQ down more than three percent during Friday alone, biotech continued to suffer along with other high beta sectors. Small caps throughout the market were also thumped on the week.
Performance Update:
With the continued hit the sector took this week, our benchmark the iShares Nasdaq Biotechnology ETF (NYSE: IBB), the largest ETF focused on the biotech sector with almost $9 billion in assets, is now down 25.51% since we launched the Biotech Gems service at the start of May of 2015. This sector ETF is also down more than 35% from its peak in mid-summer.
Our large cap core positions are now down 7.78% on average while our small cap portion of our portfolio gained more than three percent on the week and is now down 31.96% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 19.87%, 564 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 13.83%, 1,168 basis points above the benchmark.
Portfolio News:
Earnings from our large cap positions continue to come in better than expected; Gilead Sciences (NASDAQ: GILD) once again trounced expectations on Tuesday. Earnings came in 10% above the $3.00 a share the biotech concern was expected to earn. Revenues were almost $400 million above the consensus. Gilead also upped its dividend by some 10% and added another $14 billion to its stock buyback authorization. Despite all this good news, the stock was barely up on the week. In a more normal environment, I would have been surprised by less than a 10% weekly move on these robust results.
Relative newcomer to the Biotech Gems portfolio TG Therapeutics (NASDAQ: TGTX) was one of few small caps that bucked the downward trend of the market this week. It was up almost five percent on the week. I saw no news to account for the rally but it is nice to see something post a gain from the small cap sector in another difficult week. Synthetic Biologics (NYSE: SYN) posted a significant decline after dropping Trimesta from development after a failed Phase II trial. The company previously announced very positive results for its compound SYN-010 in Phase II trials last month. This is why we always ensure we invest in companies with multiple “shots on goal” in this highly volatile space.
Strategy Thought:
We are not making any modifications to the portfolio this week as the outlook has not really changed on our holdings, other than sentiment on the biotech sector has become beyond putrid at the moment. However, for subscribers that have full allocations already in our large cap core positions and are looking to diversify beyond those five but still want a “safe” place to add new funds in the sector. I highly recommend Celgene (NASDAQ: CELG). This biotech juggernaut easily fits within my definition of a “core” holding. I consider our “5B” pick in this category. I own it in bulk. Like most of the biotech sector it has sold off recently and is under $100.00 a share. The company should produce $11.00 to $12.00 a share in earnings by FY2019 according to the analyst consensus so it is very cheap on a longer-term basis. Just a thought as we ride out this rocky market together.
For those still filling out their core positions, both Amgen (NASDAQ: AMGN) and Gilead look ridiculously cheap here. Both concerns easily beat both the top and bottom line consensus during their quarterly results. Both also hiked their dividend payouts recently as well.