This has been another week in which higher quality companies with more stable revenues have tended to hold up better than lower quality names. A slew of negative news from large multinationals, including Volkswagen’s (VLKAY) emissions cheating and Caterpillar’s (CAT) revenue cut and layoffs, added to a general sense of pessimism.
Clearly, global markets remain on edge after the Fed decided to sit pat. Over the last week, large caps were down 2.9% with growth (-2.7%) holding up a little better than value (-3.1%).
Small caps continue to hang in there as an asset class with declines in line with large caps. The little guys were down 2.8% for the week, with growth down 2.9% and value down 2.7%.
Micro caps were knocked around a bit more, falling by 3.2%.
There were no real surprises when I reviewed small-cap sector performance over the past week. Energy (-9.9%) is still very weak. Consumer staples (-0.9%) and financials (-0.6%) are the most resilient. And somewhere in the middle are our best friends, IT (-3.3%) and healthcare (-4.1%).
That was through Thursday’s close though, and futures for today point to a positive end to the week.
Federal Reserve Chair Janet Yellen spoke after the market close yesterday and indicated she sees a rate hike before the end of the year. At this point, I’m inclined to think that would be a positive (it appears the market agrees) since it would indicate that the U.S. economy is indeed strong enough to handle it.
The message is that it’s still time to be somewhat defensive. Look to find an exit point with stocks in which the fundamentals aren’t so hot and the chart is breaking down. And look to pick up stocks in which the fundamentals look good and the chart is showing a window of opportunity, or where the trend is just so darn intact that you know you’ll be kicking yourself in a year if you don’t act.
Starting next week, we’ll get into some of these ideas. My first Issue of Cabot Small-Cap Confidential will be sent out on Friday, October 2, and I’m working on a number of ideas that I think will work out well.
Talking Small Caps with Bloomberg
Speaking of ideas, I presented a few yesterday during a Bloomberg LiveINSIGHTS webinar that was sponsored by Aberdeen Asset Management. I won’t spoil the surprise in case you want to watch the replay, but I will say that I talked about one trend at length, and presented three different stocks to play it. These are stocks that I have followed for a while and any one of them could be a candidate for our portfolio in the future.
There were two other small-cap specialists, and we each presented for about 10 minutes (I went second). A Q&A session followed.
You can check out the replay here.
Hillary Clinton Weighs in on Drug Prices
I’d be interested to know what you think of Hillary Clinton’s tweet on Monday.
The message was soon followed by declines in biotechs both large and small, and the entire sector ended Monday over 5% in the red. She followed through on Tuesday by laying out her plan for pulling in prescription drug prices. This included proposed caps on copayments, elimination of tax breaks for advertising, minimum R&D spending requirements, and empowerment of Medicare to negotiate drug prices.
The argument isn’t exactly new. Similar messages from high-profile people have forced the industry to tackle the subject of rising costs for years. I recall very well the pressure that Gilead (GILD) came under for pricing its hepatitis-C miracle pill, Sovaldi, which cost around $70K for a full cycle.
As investors in small and micro-cap biotech stocks, we know all too well how difficult it is for drug companies to succeed. The costs for R&D aren’t going down and the timeline to get drugs through clinical trials isn’t getting shorter. If you reduce the size of the prize, how many companies won’t want to run the race?
I want these drugs to bring in tons of cash for those companies that succeed so shareholders get a well-deserved payday. But as a husband, father and son of aging parents, I don’t want to spend more on drugs and healthcare than I do on other necessities, or in lieu of them.
If Hillary has the answer, I’m all ears. But we all know this is part of the political posturing game. Her Democratic rival, Vermont’s (my native state) Senator Bernie Sanders put forth a bill in Congress earlier this month that included similar measures, most notably empowerment of Medicare to bargain. The Boston Globe reports that Sanders’ mirrors a Massachusetts bill that includes a cap on certain drug prices.
Regardless of where you fall on all of this, I think it’s only reasonable to expect drug pricing will be a growing part of the discussion as presidential candidates vie for attention. That’s something for us to keep in mind as we monitor price action in our biotech stocks and consider adding new positions.
This is an excerpt from Cabot Small-Cap Confidential, which features little-known stocks with big potential. It offers a limited number of subscribers the opportunity to discover overlooked, low-priced stocks that have the potential to skyrocket. This advisory is best suited to experienced investors who embrace volatility.