Are healthcare stocks a too-crowded trade for now?
The healthcare sector was a relative outperformer last year, as represented by XLV vs SPX below. Healthcare providers and large pharma companies (such as Lilly and Novo Nordisk) contributed to the comparative strength of the overall sector during 2022
The healthcare sector was a relative outperformer last year, as represented by the US Healthcare Sector ETF XLV vs the S&P500 index below. Healthcare providers and large pharma companies (such as Lilly and Novo Nordisk) contributed to the comparative strength of the overall sector during 2022. The sector’s resilience to economic slowdowns and positive news flow regarding new drugs e.g., neurology and diabetes were likely drivers. However, XLV has recently lost ground to more economically sensitive stocks and seems to be breaking down from the recent uptrend in relation to the general market. This could spell relative weakness for the healthcare sector in the short term, which is already a “crowded” trade. According to the Bank of America Fund Manager Survey in December 2022, investors responded that their relative overweight in healthcare stocks was close to all-time highs.
Healthcare Sector ETF (XLV) (in USD) in relation to S&P500 ($SPX) (in USD)
Healthcare Sector ETF (XLV) (in USD) in relation to S&P500 ($SPX) (in USD), weekly five year graph
In the last three years, Moderna Therapeutics has risen to worldwide fame due to its expertise in vaccine and drug development in mRNA medicine and its subsequent role in the rapid advance of Covid-19-vaccines. Despite an almost 70 per cent drop in the share price since all-time highs in 2021, Moderna’s market cap is still up more than ten times since the beginning of 2020. Demand for covid vaccination is dwindling, and Moderna’s revenues are falling rapidly. Moderna is focusing on new therapeutics and vaccine areas, but they are unlikely to make up for the expected loss of income from covid-19-vaccines in the foreseeable future. According to S&P Capital IQ, Moderna is trading at some 47x expected 2023 earnings, well above its closest peer BioNTech at around 8x.
A short position in Moderna is a feasible alternative for investors expecting relative weakness in healthcare stocks. One counter-thesis is possible news regarding Moderna’s clinical development of a vaccine against RSV infections, which is expected soon. However, the competition from pharma giant GSK is fierce in this indication.
Moderna Therapeutics (in USD), daily 12-month price chart
Moderna shares are already up 60 per cent since the October 2022 lows; thus, there might be room for a retracement in the near term.
Moderna Therapeutics (in USD), a five-year chart from December 2018 to January 2023
The full name for abbreviations used in the previous text:
EMA 5: 5-day exponential moving average
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
BB 20,2: Bollinger Bands area flowing MA20 and 2 standard deviations
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence
Risks
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