Apr 19, 2023

Finding Value in a 'Unique' Niche of the Healthcare Sector

Markets opened the new trading week in a mixed fashion Tuesday as equities did not get a boost from the agreed-upon debt-ceiling deal over the weekend. Investors had more than anticipated that event with the rally in equities late last week.

On the day, the Dow Industrials fell slightly, the S&P 500 was flat and the Nasdaq gained nearly a third of one percent. Nvidia (NVDA) briefly made it into the trillion-dollar market cap club before settling for a 3% gain at the end of the day. The stock can now be yours for a paltry 36x trailing revenue.

Futures are pricing in nearly two in three chance that the Federal Reserve will hike rates yet again at its next meeting in June, which compares to a one in four chance at the beginning of last week. Stronger-than-expected economic data are fueling increasing expectations for another pop in the Fed Funds rate.

My view is the central bank will continue to push rates higher until it throws the economy into recession. The main question is how long and deep that contraction will be and what other financial land mines are out there. The second-, third- and fourth-largest bank failures in U.S. history over the past few months don't seem to have had a longer-term impact for investors' appetite for equities, at least when it comes to the mega-cap part of the market or anything that has to do with AI.

I find myself largely remaining on the sidelines while I keep rolling my short-term Treasuries and covered call holdings. "Grinding away" is how I would describe my actions in poker terms.

I continue to watch insider buying to help identify possible new trading ideas. One new name that has come on my radar this week because of significant recent insider buying is Royalty Pharma plc (RPRX) .

Royalty Pharma occupies a somewhat unique niche in the healthcare industry. As the name implies, the company is a buyer of biopharmaceuticals royalties, boasting more than 35 commercial-stage products -- including 15 blockbusters -- as well as 11 prospective (clinical-stage) assets. Since inception through the end of 2022, Royalty Pharma has deployed $17 billion to purchase royalties, milestone payments and related assets on approved products and $8.3 billion to acquire potential revenue streams from developmental-stage candidates.

The stock is down around a quarter from its highs of late last year despite a strong first quarter. Royalty Pharma has brought in a new CEO, who promptly bought more than $7 million of new shares. The company has produced consistent top-line and cash flow growth since coming public a few years ago.

Royalty Pharma could face declining revenue from a star of its portfolio, Trikafta, as early as late 2024 provided a new, improved combo therapy from Vertex Pharmaceuticals (VRTX) does well in late-stage trials and is approved. However, the company has also positioned itself to benefit from the development of two of the most promising agents targeting Lpa, a well-known risk factor for cardiovascular disease.

Trading a 8x this year's projected earnings and with a 2.5% dividend yield, RPRX appears to be a solid value stock in an overvalued market.

At the time of publication, Jensen was long RPRX.

The bulls deserve the benefit of the doubt now that the market is finally starting to broaden out a bit, but extreme care is warranted.

Amid green lights on the charts, the market's data dashboard is starting to raise a few caution signs.

The charts of the building materials supplier are firming up.

A lot of downtrodden smaller stocks have rallied, but one day does not a trend make.

Is a crackdown on the cryptocurrency market the outlier that stock traders didn't see coming because they were focused on inflation and interest rates?

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