Are Drug Stocks a Prescription for Profit?

“Big Pharma” has been one of the strongest and steadiest areas of the stock market over the last few years. We saw this trend coming.

In the August 2012 edition of Independent Living we stated, “Among the big winners of the Supreme Court green-lighted health insurance mandate looks to be prescription drug companies.” We reported, “As a result of the Affordable Care Act, which drug industry lobbyists helped craft, an estimated 259 million additional prescriptions will be written in 2014, 346 million in 2015, and 442 million in 2016.” And concluded, “The future looks relatively bright for the pharmaceutical industry.”

To be clear, we are and will continue to be critical of pharmaceutical companies for the influence they exert on our government. And for helpin g get millions of Americans needlessly “hooked” on prescription drugs. However, when it comes to investing, our editorial team isn’t biased against politically connected, politically incorrect, or unpleasant industries. We aim to identify trends that are potentially profitable and leave it up to our readers to decide for themselves whether investing in them is ethical.

The bottom line on Big Pharma is that it’s too late to be buying these stocks aggressively. They carry much greater downside risk now than they did in 2012, because share prices are now much loftier. We’ve seen it with other sectors that get hot for a few years – they attract “good news” fundamental buyers and momentum traders who ride the trend for a while, then get burned when it reverses.

Tortoise Investing Puts You Ahead

The hare takes the lead, but the tortoise wins the race. That’s how it usually ends up in investing. Warren Buffett will never be able to boast of making spectacular gains day trading. But 99.9% of momentum traders will never become billionaires.

The way to build wealth over time is to buy assets that are out of favor and undervalued. They probably won’t deliver strong gains over the short term. The spectacular gains come over the long-term for those who bought before the herd. The good news is that are plenty of areas in natural resources and emerging markets that today are oversold and undervalued.