Drug Stocks, Biotechs Among Best to Own in 2Q

Drugmakers and biotech stocks could be set to take off next quarter, if past is precedent

by Kirra Fedyszyn

Published on Mar 28, 2017 at 12:18 PM

The best time of year to buy stocks will hit its final stretch in April, but not before the second quarter kicks off. Schaeffer's Senior Quantitative Analyst Rocky White has compiled data on how major exchange-traded funds (ETFs) and individual stocks have historically performed during 2Q. As you can see in the chart below, shares of the SPDR S&P Biotech ETF (XBI) and SPDR S&P Pharmaceuticals ETF (XPH) have outperformed over the past decade, ending the second quarter positive 90% of the time, and gaining an average of 5.3% and 4.7%, respectively.

Best 2Q ETFs March 28

Bearish Traders Have Pounced on XBI, XPH Shares

At present, shares of XBI are up about 37% year-over-year at $69.50, after a recent pullback found support at the 40-day moving average. Options traders have been betting on more gains, too, purchasing calls over puts at a faster-than-usual clip in recent weeks. Specifically, SPDR S&P Biotech ETF has a 10-day call/put volume ratio of 1.05 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- higher than 76% of comparable readings from the past year.

XPH has been rather less impressive over the last 12 months, adding about 5% to trade at $42.26, and recently running into trouble at the 200-day moving average. Amid these technical troubles, short sellers have been decreasing their bearish exposure to SPDR S&P Pharmaceuticals ETF. Since topping out at a record high of 3.6 million shares in March 2016, short interest has fallen by nearly 81%.

Vertex Pharmaceuticals, McKesson Among Best 2Q Stocks

Turning our attention to individual stocks, the biotech and drug sectors have made a strong showing in the second quarter over the last 10 years. Positive 90% of the time, with a whopping 18.5% average return, is biotech Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). Not far behind, drugmaker McKesson Corporation (NYSE:MCK) has also had a positive second quarter in nine of the past 10 years, adding 7.9% in the period, on average.

Best 2Q Stocks March 28

The past year hasn't always been easy for shares of VRTX, but the stock has rallied hard off its December low, adding 26% to trade at $89.86, with the help of its 40-day moving average. Analysts have mixed opinions on the stock, as half rate the shares a "buy" or better, while half maintain a "hold" recommendation. Options traders appear more clear in their bullish outlooks, though, with the equity's 10-day call/put volume ratio of 5.87 on the ISE, CBOE, and PHLX seated in the 81st annual percentile.

That said, it's a much more attractive time to sell premium on Vertex Pharmaceuticals Incorporated than to buy it. With a Schaeffer's Volatility Index (SVI) of 62% at a 12-month high, the stock's short-term options are pricing in historically inflated volatility expectations.

Meanwhile, MCK is in the red on a year-over-year basis, and has yet to close its late-October post-earnings bear gap. But the shares have tacked on more than 6% so far in 2017 to trade at $149.52, and found a foothold in the $145 neighborhood -- home to its 80-day moving average. The stock could stand to benefit from a round of upbeat analyst attention, considering 10 out of 12 tracking firm rate McKesson Corporation a tepid "hold" at the moment.

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