Costco’s Healthcare Move Turns Heads. We’re Buying These Pharma Stocks Instead.
Is pharma heating up? Let’s chart four sector names and… Costco?
You've reached your free article limit
You've read 0 of 1 free Pro articles.
According to a report in the Wall Street Journal, Costco (COST) is about to launch its own Medicare Advantage plan in two states as part of a limited rollout. Costco is teaming up with SCAN Health Plan, which already offers Medicare Advantage (part C) plans in select counties in six states.
Does that mean we should buy the stock? According to Costco’s chart, the answer is no.
Over the past 12 months, Costco shares have been flat as a pancake, losing about 2%.
Costco is resting on its 200-day moving average (red), which is horizontal due to a lack of price direction.
The longer-term monthly chart reveals that Costco is a victim of its own success. This stock, which has doubled over the past five years, has spent the past 18 months consolidating its gains (shaded yellow).
Costco has been a big winner for some folks, but until this stock shows some persistent directional movement, I’m not considering a position.
Adding to Merck and Johnson & Johnson
Late last year, we rolled the proceeds from some tech sales into two pharmaceutical companies, Merck (MRK) and Johnson & Johnson (JNJ). Eight months have passed, and both names have performed well.
Merck has gained 33% since our December 2 entry (point A). Earlier this month, Merck reported a much smaller than expected loss. The stock reached an all-time high this week.
J&J closed at an all-time high on Tuesday, and has gained 31% since our early December entry (point A).
Why add to Merck and Johnson & Johnson just as both names are reaching new all-time highs? Because the pharmaceutical sector is one of the strongest areas of the market right now.
Take a look at the chart of the bellwether State Street SPDR Pharmaceuticals ETF (XHP). This ETF, which contains a diverse group of pharmaceutical stocks, has gained 31% year-to-date.
XHP also closed at an all-time high this week.
Amylyx and Acadia
In addition to Merck and J&J, other names in this sector are trading at or near 52-week highs. Shares of Amylyx Pharmaceuticals (AMLX) jumped 63% on Tuesday on a 20-fold increase in volume, after favorable trial results of a hypoglycemia drug.
Also on Tuesday, Acadia Pharmaceuticals (ACAD) jumped 4% to reach its highest price in over two years. Earlier this week, UBS maintained its buy rating on the stock, while raising its price target from $45 to $49.
I’m opening a small position in Acadia. I’m not willing to chase Amylyx after a 63% gain, but I’ll consider it on a pullback.
Bottom Line
We’ve lightened up considerably on tech in recent weeks, so we’re putting some of that cash to work in a stronger area. While tech stocks could rally once again, we’re looking for more balance going forward.
At the the time of publication, Ponsi was long MRK, JNJ and ACAD.
