Coronavirus drug and testing developments are providing hope for investors eager for anything that will help mitigate the pandemic.
Last month saw the introduction of new Covid-19 antibody tests, a potential plateau in hospitalizations in hots pots like New York and positive trial data on a treatment to combat the virus.
Those developments helped the S&P 500 health care sector gain 12% for April, for the best one-month gain in two decades. The sector's top performing stocks were diagnostic firms at the heart of the Covid-19 testing expansion. For the month, Hologic gained 42%, Quest Diagnostic gained 36%, followed by Incyte Corporation which is developing a coronavirus treatment and gained 33%.
"Just a few months ago, investors were fleeing the group over political worries around a drug pricing bill … that would be the one thing Congress and the president could agree on, and then the pandemic hit," said Nancy Tengler, chief investment officer of Laffer Tengler Investments, adding "now, pharma and biotech are the solution to the problem and the stock prices have outperformed the market."
The sharp reversal came after three straight months of losses, with the Health Care Select SPDR ETF which tracks the sector, ending the month about 5% below its January historic high, while the S&P 500 remained in correction territory more than 10 percent below recent highs.
The biotech sector recovery was a standout, outpacing the health care sector and the overall market. The iShares Nasdaq Biotech ETF gained 15%, hitting a new 52 week high, ending April up nearly 3% for the year. The large cap SPDR S&P Biotech ETF gained about 21% for its biggest monthly gain since its inception in 2006.
Despite that big move, biotech analyst Michael Yee, a managing director at Jefferies, thinks the sector still has room to move higher over the next few months.
"While near term we've had a strong move, we generally think the market will continue to rotate into healthcare and biotech and these could be areas of leadership in the market given big macro uncertainties in other areas of the market," said Yee.
Covid-related biotech stocks were among the best performers this month. BioCryst which is testing an antiviral drug, gained 85%. Opko Health, which is developing antibody testing, gained 68%. Vaccine maker Moderna rose 54%.
Yet Gilead Sciences, the maker of the one of most promising antiviral treatments, lagged the biotech sector and the overall market. Gilead gained just under 9% for April despite reporting positive data for its Remdesivir treatment in a trial with the National Institute of Allergy and Infectious Diseases.
"Gilead is quite under-owned across the market given the tough past few years. This is a big turn-around story on the fundamental biz and the growing pipeline," said Yee.
For value investors like Tengler, the long-term story remains positive for health care, but the run up in April was a little too much, too fast. So, she took some money off the table.
"The reason we owned the stocks going into the pandemic was valuation and our view that pharmaceuticals are the solution to high health care costs," Tengler explained, but now she says the valuation proposition has changed.
"We exited Abbott Labs due to valuation, have trimmed J&J and Amgen — our two largest holdings as they have appreciated to outsized holdings," she said.
For the biotech sector, May can be a volatile month, depending on expectations for cancer drug trial data, in the lead up to the meeting of the American Society of Clinical Oncology or ASCO which is scheduled to begin on May 29.
Last year, the SPDR S&P Biotech ETF fell 6.75%, as the start of the Democratic presidential primary raised worries about Medicare-for-All. But on average, the biotech sector has gained nearly 4% in May over the last 5 years, and nearly 2 percent over the last decade.