These Two Biotechs Offer Stability in a Crazy Market
A slow and steady approach with these stable biopharma stocks offers refuge from a market that feels ready to pop.
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The market continues to trade near all-time highs, as the AI narrative continues to drive the rally. But that story is starting to develop some notable holes.
Meta Platforms (META) and Space Exploration Technologies Corp. (SPCX) are renting out their unused compute capacity that they have built for internal use to other users. The hyperscalers are executing large debt and equity capital raises to fund their surging capital expenditure budgets, which are getting hurt by soaring prices for NAND (flash memory), DRAM (a type of memory used in semiconductors) and graphics processing units. Amazon (AMZN) surprised some in the market by announcing an additional $25 billion bond sale this week to fund its roughly $200 billion capital expenditure budget this fiscal year. And half of this compute capacity is being built for Anthropic and OpenAI. Both of these companies are bleeding cash and hope to raise tens of billions by going public in the coming quarters. Both face increasing competition from much cheaper Chinese AI models and other names trying to expand their footprint in the modeling space with cheaper offerings like Meta Platforms.
My view is at some point this bubble will pop. Will the decline be as extensive as the one following the Internet Boom? As my late father would quip “only the shadow knows.” I doubt the crash will be as bad as the one from early 2000 to the summer of 2002, but I have little doubt it will trigger a bear market. In addition, tech spending is the main driver of gross domestic product growth right now.
Given that outlook, I am being very conservative with my portfolio allocation. Today, I highlight two biopharma names I initiated a position within this week via covered-call orders using option strikes roughly 10% below the current trading level of the target stock. At this point in the market cycle, I am more than happy to give up a bit of potential appreciation for additional downside risk mitigation.
First, I opened a covered-call position in Bristol-Myers Squibb Company (BMY) this week. It is hard to find a more mundane large biopharma name. The company is seeing flat revenue and earnings growth as growing sales from new products offset revenue declines from its legacy product portfolio. That feels priced into the stock at just over nine times earnings. The company is using is prodigious cash flow to pay down debt and pay out a just over 4.3% yielding dividend payments. I can make that yield more attractive by holding the stock within covered call positions.
The second recent addition to my portfolio is Exelixis (EXEL), a mid-cap name that I have profiled many times on these pages over the past half decade. The company continues to be powered by ongoing growth from its oncology franchise Cabometyx. Exelixis is the classic growth-at-a-reasonable-price stock with earnings growth in the mid to high teens on sales growth in the low teens. Given that the shares have a reasonable valuation at 18-times forward earnings, the stock does not have a dividend but the company buys back a significant chunk of its own stock, $430 million in its last completed quarter. Significant given the stock’s just over $14 billion market capitalization.
Both BMY and EXEL have provided several successful covered-call trades for my portfolio over the years. I expect these new positions to work out similarly,
At the time of publication, Jensen was long AMZN, BMY and EXEL
