“Be greedy when others are fearful and fearful when others are greedy.”—Warren Buffett
Warren Buffett has offered up a lot of good nuggets of investing wisdom over the years. But this is one we at Cabot Investing Advice particularly subscribe to.
Taking a contrarian stance can often produce hefty returns. Sometimes the best time to invest in good companies is after they’ve been knocked down a peg or two by some bad publicity. Naturally, that brings me to Hillary Clinton.
The 2016 presidential hopeful/former First Lady made waves on Wall Street earlier this week when she scolded “profiteering” pharmaceutical companies for “making a fortune off of people’s misfortune.” If elected, Clinton pledged to limit the amount of money an individual can spend on prescription drugs to $250 a month, allow Medicare to negotiate down prices of prescription drugs, and stop the big drug companies from spending government grant money on advertising.
Almost simultaneously, The New York Times published an article about one big pharma (Turing Pharmaceuticals) jacking up the price of a 62-year-old parasitic infection drug called Daraprim from $13.50 per tablet to $750 per tablet overnight! The Times’ expose outed several other drug companies for similar price hikes, several of which did so by simply buying old neglected drugs and turning them into high-priced “specialty drugs.” Pretty shameful.
All of that has hit biotech stocks hard the last few days. The iShares Nasdaq Biotechnology (IBB) exchange-traded fund, whose holdings include big pharma stocks such as Celgene (CELG), Amgen (AMGN) and Gilead Sciences (GILD), is down 7% since Monday (compared to a mere 1% drop in the S&P 500). Valeant Pharmaceuticals (VRX), one of the few public companies the Times article mentioned by name, has fallen even further, shedding 11% since Monday.
Between the broad market correction in August and this week’s bad-publicity sell-off, biotech stocks have now declined 17% in the last two months. Ordinarily, that kind of drop-off would be a major sell signal. But in this case, it looks like a buying opportunity.
Prior to the last two months, biotechs were perhaps the hottest sector on the market. The IBB is still up 9% year-to-date despite the recent selloff, and more than 18% in the last year. New technologies are producing a wave of exciting new treatments for diseases that had previously gone untreated, prompting investors—including many of the big institutions—to flock to the biotech sector. That trend didn’t suddenly disappear; it’s simply hit a roadblock.
Soon enough, biotech stocks will bounce back. The market will stabilize (it’s already trying to), and outrage over drug companies’ nefarious price gouging will subside. Even if Hillary Clinton wins the election, she won’t take office for another 16 months. And it’s doubtful she’ll sign a bill capping drug prices the day she takes office. Any kind of healthcare overhaul takes time—just ask President Obama.
Hillary Clinton’s stance against big pharma makes for good headlines and fodder for the talking heads on CNBC (not to mention Fox News). But right now, they’re just words. You shouldn’t invest based on what one person is saying, even if she could eventually become the most powerful person in the world. The good news is that plenty of people are acting based on Hillary’s (and The New York Times’) words, thus allowing growth investors to get in on the next biotech rally at a significant discount.
Look, I’m as outraged by big pharma price hiking as anyone. But not every company is guilty of doing it. There are ways to make money on biotechs without compromising your ethics. Do your research and find out which companies are dirty and which ones are … well, at least less dirty. You could also subscribe to our Cabot Small-Cap Confidential advisory, where new editor Tyler Laundon does all the research for you—getting into the grimy details of how each company makes its money.
(To subscribe to Tyler’s Small-Cap Confidential advisory, click here.)
For what it’s worth, Tyler is still bullish on biotechs in spite of the sector’s recent slump. Given Tyler’s recent track record—a not-too-shabby 2,300% cumulative return (including winners and losers) since 2012—it’s worth paying attention when he’s bullish on a sector. Some of Tyler’s biggest winners over the last few years have been biotechs, including Endocyte (ECYT +115%) and Gilead Sciences (GILD +75%).
Biotech stocks are a beaten-down sector right now, pummeled by a string of bad headlines. But sometimes it pays to buy on bad news. Just ask Warren Buffett.