Most people don’t know this about me, but I once studied to be a doctor.
But when I discovered trading, I realized I’d found my true calling.
I dropped out of medical school and never looked back.
Still, those early years had a major impact on my thinking. I probably would have never built my Green Zone Power Ratings system without the analytical skills I learned.
I was reminiscing about this last week after news broke that Moderna (MRNA) may have discovered a real cure for cancer.
That news alone would be the greatest medical breakthrough in decades. But the even bigger news is how Moderna pulled it off.
Existing cancer treatments take a shotgun approach, meaning they blast away at tumors using radiation or chemotherapy and hope to kill the cancer without harming the host.
Moderna took a more unique approach.
Using cells from the patient’s tumor, Moderna’s cancer treatment trains the patient’s immune system to attack the cancer cells.
It’s revolutionary and opens up an entirely new field of personalized medicine. Imagine a world in which your doctor prescribed a drug that was tailor-made for you… designed with your precise genetics in mind.
That’s not science fiction. It’s real, and it’s coming sooner than you think.
This is an exciting time to be in medicine. So, with that in mind, let’s do a sector X-ray of the health care sector.
“Health care” is a big tent. It includes everything from cutting-edge biotech firms to staid, old health insurance companies. It’s also fairly evenly distributed on my Green Zone Power Ratings system.
Of the 58 energy stocks I track, 16 rate as “Bullish,” meaning a score of 60 or higher out of 100. (For those new to my system, “Bullish” rated stocks outperform the S&P 500 Index by double on average over the following year.)
Moreover, 18 rate as “Neutral,” meaning my system would expect them to perform more or less in line with the broader market. And 24 rate “Bearish,” meaning my system would expect them to significantly underperform the market.
This tells me that the sector as a whole is far from a slam dunk. So, we’ll want to pick and choose which stocks we buy.
Let’s keep digging.
Where Does Health Care Pick Up Points?
The Green Zone Power Rating system is a composite score based on six primary factors: momentum, size, volatility, value, quality and growth, each of which comprises several sub-factors. (As we are looking at large-cap constituents of the S&P 500, I don’t consider size when doing the sector X-ray.)
So, where do health care stocks pick up the most points?
The single most “Bullish” factor is quality. Fully 50 out of 58 stocks rate 60 or better on their quality factor.
That’s not terribly surprising.
My quality factor is a composite score based on various measures of profitability, balance sheet strength and capital efficiency.
Once the initial investments in research and development have been made, branded pharmaceuticals are a license to print money. They enjoy juicy margins while under patent protection, and their variable costs are practically nil.
Health care stocks also rate exceptionally well on volatility. (Remember, a high volatility rating means that the stock exhibits low volatility. It tends to not bounce around all that much relative to the broader market.) The sector has traditionally been considered defensive, as demand for medical care doesn’t vary much with the strength of the economy.
Our economy is fragile at the moment and highly dependent on continued AI spending. While I don’t see that slowing down any time soon, it’s still a risk we have to consider. Having some health care stocks in your portfolio reduces your exposure to any tech-related slowdown.
Overall, health care stocks rate poorly on value. Only 13 out of 58 rate as “Bullish” on the factor. That’s understandable. Stocks that rate exceptionally well on quality often rate poorly on value. Investors tend to pay up for the good stuff!
The Best of the Best
As I commented yesterday, Moderna doesn’t rate as “Bullish” on my system. That’s not surprising given the boom-and-bust nature of its business. The company enjoyed a massive windfall during the pandemic, driven by its Covid-19 vaccine, but as soon as the pandemic ended, so did Moderna’s cash cow. It may be several months or years until we see the benefits of its cancer breakthrough show up in its sales and earnings.
But what about the rest of the sector?
I compiled a list of all “Bullish” rated health care stocks. Let’s take a look to see if any jump off the page.
Remember when I said that personalized medicine is coming faster than you think?
Incyte Corp (INCY) is part of that story. The company pioneered testing for genetic biomarkers in blood cancers. It also has a suite of oncology and autoimmunity treatments.
Incyte is rated “Bullish” across all factors and earns a perfect 100 on its growth and quality factors.
Bristol Myers Squibb (BMY) also rates as “Bullish” across all sectors and rates exceptionally well on volatility. Its revenues are primarily driven by two blockbusters, cancer drug Opdivo and anticoagulant Eliquis.
Both face the end of their patents within the next few years, so the company’s continued success will depend on its up-and-coming pipeline.
Finally, DaVita (DVA) rates as “Bullish” across all factors, and unlike the others, faces no patent cliffs.
DaVita provides dialysis to patients with kidney disease, serving close to 300,000 patients across the U.S. and overseas.
To good profits,
Adam O’Dell
Editor, What My System Says Today
