Let's face it -- we'd all rather buy stocks when they're down rather than up. Some investors mentally struggle to step into a stock even after the slightest of rallies, in fact, perhaps trained a little too well to be bargain-minded.
But such a mindset can ultimately prove limiting. Lots of red-hot stocks are able to continue rallying for weeks on end, even when sustained bullishness seems impossible.
With that as the backdrop, not only are the Dow Jones Industrial Average's (^DJI 1.18%) best-performing stocks since the end of March still perfectly safe to step into, but their month-to-date strength may also be a bullish hint of a young recovery effort.
Then, there's the other, less-considered bullish argument.
A clear common thread
April's hottest Dow stocks? UnitedHealth Group (UNH -0.10%), Johnson & Johnson (JNJ -0.43%), Merck (MRK -0.58%), and Amgen (AMGN 11.82%), up 9.1%, 7.6%, 6.0%, and 4.9%, respectively.
The common element among the four tickers is crystal clear -- healthcare. Three of the four names are pharmaceutical stocks, while the fourth (UnitedHealth) is in the health insurance business. Notably, with the modest exception of Merck, these blue chip stocks have been subpar performers since the end of last year.
This group action isn't likely to be a mere coincidence either.
See, while a stock's valuation generally reflects the market's current perception of that company's prospects, perceptions of an industry as a whole also matter. In William J. O'Neil's best-selling book How to Make Money in Stocks, the author estimates nearly 40% of any stock's gain or loss is driven by the ebb and flow of its peer stocks. More than another 10% of a single ticker's net movement is the result of the underlying sector's action.
Given this, it's unsurprising that so many stocks from the healthcare sector (and the pharma industry, in particular) are suddenly doing so well after being collectively lethargic for so long. And that's encouraging in and of itself. When an entire industry's equities begin moving in tandem, it's usually a sign of a sweeping rethink of the business's foreseeable future. These are psychological shifts that tend to last a while.
Bullish prods
That said, there are company-specific reasons these stocks are rallying as well.
Take Merck, for instance. While the patent-protection clock is ticking on its cancer-fighting Keytruda, the miracle drug is still racking up wins. The company just announced it's an effective treatment for endometrial carcinoma when used in conjunction with chemotherapy. Meanwhile, the U.S. Food & Drug Administration just approved the same therapy for a new type of solid tumor and as a treatment for urothelial carcinoma when used alongside Astellas Pharma's Padcev.
None of these wins will drive game-changing revenue, and the pharmaceutical giant still needs to work on new drugs that will replace Keytruda's sales once its patents expire in the distant but foreseeable future. These nickel-and-dime approvals really add up, though.
Keytruda's now producing annualized revenue of more than $20 billion and will continue to help fund the research and development of its eventual replacement as a breadwinner. The stock's perking up largely because investors are starting to see and believe in this transition.
Amgen's is a slightly different story. Although the company is now looking to renew the enforcement of a handful of cholesterol drug patents, the stock's recent strength may be rooted in something far bigger. As fellow Fool George Budwell pointed out a couple of weeks ago, "the risk premium will undoubtedly tilt [back] in favor of beaten-down biopharma equities over risk-free assets such as T-bills." Until then, newcomers can plug into this solid biopharma name while its dividend yield stands at a healthy 3.3%.
As for Johnson & Johnson, while it's going to prove expensive, an end to its long legal liability battle linked to its asbestos-contaminated talcum powder may finally be nearing an end. The company's upping its settlement offer to $8.9 billion to end several class action suits.
There's still no assurance plaintiffs will take the deal. But the sizable increase in its offer does suggest J&J is ready to put the distracting matter behind it, regardless of the cost. Now the market's looking ahead to life after the lawsuit, recognizing this company's a strong outfit with highly marketable products.
Not only is this the organization behind consumer brands like Tylenol and Benadryl, but Johnson & Johnson also quietly owns blockbuster drug franchises, like plaque psoriasis and psoriatic arthritis treatment Stelara and oncology drug Darzalex. Its portfolio is well diversified.
And UnitedHealth? Its bullish prod isn't quite as clear as the ones that lifted the three drug companies in focus here; new Medicare rules revealed last week favor the insurer. In simplest terms, measures meant to prevent overbilling that would prove complicated and costly for UnitedHealth to implement were watered down while their enactment timeframes were lengthened.
A thoroughly bullish case
Don't misread the message. Stock-picking is still, ultimately, an exercise identifying a particular company's prospects and spotting instances when the market is underestimating those prospects. To this end, the Dow's drug companies' stocks have been poor performers for months now but undeservedly so. They've all had -- and still have -- compelling futures. Investors just collectively lost sight of these futures for the better part of the past three years. It happens.
In this particular case, though, the turnaround is also sector-wide, suggesting a deeper-seated rethink of these stocks' upsides. It's the sort of dynamic that tends to last a while once in place, making all three of the Dow's pharmaceutical names attractive buys. There's so much more room ahead for these stocks to recover, only bolstering the long-term bullish argument.
That said, UnitedHealth Group isn't a bad bet here, either. As Raymond James analyst John Ransom explained of last week's upgrade of the stock on CNBC, "We were concerned about the overhang of some complicated regulatory actions...suffice to say these were cleared up in early April."
