Making Three Changes to Our Portfolio This Week
The market got off to a much stronger start in March than in January and February. March 1st provided the biggest one-day rally to commence a month in some three years, and stocks closed the week with a nice gain to start the final month of the first quarter.
The rally was driven mostly by short covering. Some of the worst performing sectors of the market led the rise. Miners, which have just been battered over the past year, had a monstrous rally including Vale (NYSE: VALE) and Freeport McMoRan (NYSE: FCX). The energy sector was strong overall with huge gains for the offshore drillers like Transocean (NYSE: RIG) and Seadrill (NYSE: SDRL). This worst to first action in these two sectors leaked a bit over into the biotech sector which was up slightly during the week with small caps somewhat outpacing their larger cap brethren for a change.
Performance Update:
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 23.50% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are now down 8.40% on average while our small cap portion of our portfolio is now down 28.91% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a blended loss of 18.66%, 484 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a loss of 13.53%, 997 basis points above the benchmark.
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Portfolio News:
There was little in the way of analyst activity on any of our small cap holdings nor were there significant trial results. Horizon Pharma (NASDAQ: HZNP) lost a little more than 10% on the week as it announced it was the target of a subpoena from the Department of Justice over its use of specialty pharmacies. This is one of the problems that Valeant Pharmaceuticals (NYSE: VRX) has had as well. Not surprisingly, given the election season, neither of these companies are headquartered in the United States. Eagle Pharmaceuticals (NASDAQ: EGRX) also gave up some of its recent gains this week although it still has been a strong performer since recently being added to the portfolio.
On a brighter note, both TG Therapeutics (NASDAQ: TGTX) and pSivida (NASDAQ: PSDV) advanced nearly 10% on no real news this week. Lexicon Pharmaceuticals (NASDAQ: LXRX) leapt 20% after its quarterly results. The company will also be presenting at the 36th Annual Cowen Healthcare conference this Wednesday.
Portfolio Changes:
Heat Biologics (NASDAQ: HTBX) refused to bounce after its recent declines triggered by poor trial results. As I articulated in last week’s update, if a rally did not materialize the stock would be booted from the portfolio. We are also expunging Horizon Pharma. As noted above, the company has become the subject of a regulatory probe. Although I still like the company’s long-term prospects and its current valuation is compelling, this regulatory overhang could be a major headwind for the rest of 2016.
In their place, we are adding Merrimack Pharmaceuticals (NASDAQ: MACK). The company just started commercializing its primary drug candidate, has many “shots on goal,” and is now well funded through 2018 when it should be profitable. It is also significantly undervalued after the recent bear market decline in the biotech sector. More on why Merrimack belongs in the portfolio in our special supplemental edition of Biotech Gems that will be out either today or tomorrow. With these moves, the portfolio is back down to our optimal 20 stock size.