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Are healthcare stocks a too-crowded trade for now?

Carlsquare
12 Jan 2023 | 2 min read

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)

Source: Stockcharts and Carlsquare. Note: Past performance is not a reliable indicator of future results. The graph shows the percentage development compared to the S&P 500.

Healthcare Sector ETF (XLV) (in USD) in relation to S&P500 ($SPX) (in USD), weekly five year graph 

Source: Stockcharts and Carlsquare. Note: Past performance is not a reliable indicator of future results.

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

Source: Infront and Carlsquare. Performance (Left) indexed from 10 Jan 2022 Note: Past performance is not a reliable indicator of future results.

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

Source: Infront and Carlsquare. Performance (Left) indexed from 7 Dec 2017. Note: Past performance is not a reliable indicator of future results.

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

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future results.

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