A Tale of Two Healthcare Stocks

08/05/2020 6:00 am EST

Focus: STOCKS

Joe Duarte

Editor, Joe Duarte In the Money Options

Joe Duarte discusses the diverging fundamentals of two Healthcare stocks.

Yesterday we teased a potential pairs trade by introducing a dichotomy in performance of two pharmaceutical and biotechnology firms.

We noted that while the Healthcare sector has done well, in general, there have been definite winners and losers.

While the Healthcare Select SPDR Fund (XLV), has full recovered from the Covid-19 sell-off and is up on the year, pharmaceutical giant Glaxo SmithKline (GSK) is lagging the market while biotech equipment and materials manufacturer Repligen (RGEN), a stock I recently recommended, is up roughly 50% in 2020!

If you followed that recommendation, your only question at this point would be how much of a profit should I take and when should I take it (see chart)?

RGEN

The difference is that RGEN’s management recognized the fact that Covid-19 changed the entire playing field in biotechnology and pharmaceuticals and aggressively pursued the product lines that would benefit most from a feeding frenzy in drug and vaccine research, while simultaneously managing the risk to its workforce and its supply chain successfully. The net result is that Repligen delivered a well-above estimates earnings report on July 30 and punctuated the report by raising its entire year’s guidance significantly, a fact that was picked up by the headline reading algos and the day traders who moved the stock decidedly higher.

Meanwhile, GSK, who is a major vaccine maker and should have had an advantage against other vaccine players, somehow failed to get into the Covid-19 vaccine sweepstakes early or convincingly enough and was basically left out in the cold (see chart below). Certainly, Glaxo, a usually well-run company, could bounce back. But at the moment, the stock looks like dead money.

GSX

Moreover, the move in RGEN was not a huge surprise given the company’s business and its central niche in biotech’s science and manufacturing dynamic. Furthermore, from a technical analysis standpoint, RGEN’s price action was forecasting that a positive surprise might be in the offing, as it had the following characteristics well ahead of its breakout:

  • Accumulation/Distribution, On Balance Volume (OBV) were rising
  • The stock found excellent support at its 50-day moving average while remaining above its 200-day line
  • The stock cleared stout resistance areas near 100 and again at 120 as delineated by the Volume by Price indicator which cleared the stock for a breakout in each case

In other words, because this is a treacherous bipolar market it pays off to do detailed analysis of stocks on a daily basis. If you only look at price charts, you’re only getting half the story. Thus, in order to get the big payoff in this market it’s a requirement to dig deep into company fundamentals, to understand the business, to monitor management, and to discern what the technicals are saying.

Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. To learn to trade options with less risk buy a copy of my bestselling book “Trading Options for Dummies.” Click here. To find out more about stocks that should benefit from the MEL phenomenon consider a FREE trial to Joe Duarte in the Money Options.com, click here. And check out my latest edition of Stockcharts.com’s Your Daily Five, titled “Five Stocks with Explosive Potential” where I reveal five stocks that are poised to benefit in a big way from the latest trends in MEL.

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