Investing lessons from the biotech rout

The Healthcare Model on Covestor had a challenging month in March and into early April, 2014.  As of April 3, 2014, the model while down 6.3% for the prior 30 days. Over a 90-day period, the portfolio is up 11% and, on a  trailing 365 day basis, it’s up 44.3% as of April 3, 2014.

This portfolio had a good ride with some of the bigger biotech names like Alexion (ALXN), Celgene (CELG), Biogen Idec (BIIB), Illumina (ILMN), and Gilead (GILD).  Recent biotech purchases like Vanda (VNDA), Salix (SLXP) also came under intense selling pressure during the month’s now infamous biotech rout.

This month tested my manager skills. With some of my top stocks declining, should I stay put or move aside?  Like the Wisconsin Badger’s Frank Kaminsky who learned to pivot to help get his team to the quarter-finals of the NCAA March Madness basketball tournament, I also tried to employ the Wisconsin ‘pivot’ in investing.

My first instinct as my leading holdings started breaking down was to sell and move to cash to give this portfolio some space and not risk losing the great gains it already had.

With Health Insurance stocks moving higher on the apparent success of the Affordable Care Act enrollments, I initiated a new position in United Healthcare (UNH). I initially sold then re-purchased a position in generic manufacturer Actavis (ACT), another stock with a reasonable valuation and likely to benefit with cost-savings required of Healthcare systems.

I repurchased my Amgen (AMGN) as it is one of the most reasonably priced of the biotechs I had held with a P/E of 17.94 currently, although it also remains under pressure.

I pivoted this past month and purchased Baxter Travenol (BAX) soon to split into two separate units, I added medical supply company Covidien (COV) to the portfolio and Varian (VAR), the radiation oncology equipment manufacturer.

This adds to some of the other holdings like St. Jude (STJ), and Medtronic (MDT) already in the portfolio. In other words I moved to stocks that were priced more reasonably and occasionally even paid dividends. Moving a little bit towards ‘value’ and a little away from ‘momentum’ which has been under attack in the stock market recently.

I do not claim to pivot like Kaminsky and certainly wouldn’t want to be seen on the court, but investing and responding to the market may well be considered similar to getting out on the court and playing ball.

I am not always prepared for that final 3 pointer by any opponent, but the portfolio is a team effort that requires new names and other former red-hot stars that may need to sit the bench for the time being.

DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

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