Drug Stks Seen As Safe Havens Even As Shrs Get Hammered
August 31, 1998 4:20 PM
By Melanie Trottman
NEW YORK (Dow Jones)--Large-cap drug stocks -
touted as investment havens in a volatile market - are
getting hammered Monday. But industry observers
aren't shaken.
"I would be loath to panic and sell the drug stocks," said
Brown Brothers Harriman & Co. analyst Michael
Krensavage. "I still think that they're going to outperform
the market."
Not so far today.
The Dow Jones pharmaceutical index has traded off as
much as 5.2% Monday and was recently trading down
4.5%, led by Warner-Lambert Co. (WLA), which is off
7.4%, or 5 1/2 points, at 69. Shares of the company
traded as low as 67 1/4 in Monday's trading session, off
9.7%.
Schering-Plough Corp. (SGP) has also suffered a big
loss, dropping as much as 8.2% Monday. The shares
have since pulled back, trading down 4 3/4, or 5%, at
90 1/4.
Even as the sector - which held up well last week -
undergoes increased pressure, industry observers
maintain the fundamentals of the companies remain
strong.
"Drug stocks are still definitely defensive," said Steve
Paspal, an analyst with John Hancock Funds subsidiary
Sovereign Asset Management.
Market watchers say that's because of their consistency
of earnings growth, built-in market demand, high margins
and limited overseas exposure.
Merck & Co. Leading Downturn In Group
One analyst attributed Monday's sharp decline in drug
stocks to profit-taking.
"I think people are just trying to lock in profits on the
group," said ABN Amro analyst James Keeney.
Others noted that shares of drug companies with the
lowest price-earnings ratios in their peer group were
under less pressure Monday than other drug stocks.
That includes Johnson & Johnson (JNJ), recently trading
off 4 7/8, or 6.6%, and Abbott Laboratories (ABT),
recently trading off 3 1/4, or 7.8%.
The companies in the sector with higher-price earnings
ratios have had more compression in Monday's trading
session, analysts said. Those stocks include Pfizer Inc.
(PFE), recently off 7 5/8, or 7.4%, Warner Lambert
Co. (WLA), recently off 8 3/8, or 11.2%,
Schering-Plough Corp. (SGP), off 7 3/8, or 7.7%, and
Eli Lilly & Co. (LLY), off 6 7/8, or 9.5%.
Drug giant Merck & Co. (MRK) was recently trading
lower than all of its peers, off 11 1/2, or 9%.
"Some of the drug stocks that have already been lagging
are having less of a downturn," said Sovereign Asset
Management analyst Paspal, whose fund holds positions
in Abbott, Bristol Myers, Merck, Baxter and Johnson &
Johnson.
In a report issued Thursday, Keeney projected that
seven of the large cap drug stocks appear poised to
record third quarter earnings per share growth of about
21% on an aggregate 13% increase in sales. That's
down only slightly from growth of 22% in the second
quarter, the report noted.
"We believe that drug stocks may fall less than the
market during this period of economic turmoil," the
report said.
While drug stocks did not escape unscathed last week,
they did fall less than the overall market. On Thursday,
the drug index fell 3.4%, compared with a drop of 4.2%
in the broad averages, Keeney noted in his report.
Late last week, the drug stocks essentially gave up some
of the gains they had made earlier in the week as
opposed to having followed the market's recent
continued fall, Keeney noted.
But the gap widened Monday as drug stocks fell further
from their lows last week.
Keeney described Monday's drop as "irrational selling
pressure" on the group and said the downturn "actually
might be a sign that a bottom is near at hand."
"We believe that our primary universe of large cap,
U.S.-based drug multinationals may be a relatively safe
haven, and probably lead the way up once the market
bottoms," he said in his report.
His advice to investors: take advantage of the buying
opportunities.
- Melanie Trottman 201-938-5287
smartmoney.com
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