Stocks in general have gotten off to a rocky start in 2015, and healthcare stocks in particular have run into turbulent times. Top healthcare names like AbbVie (NYSE:ABBV), Gilead Sciences (NASDAQ:GILD), and Isis Pharmaceuticals (NASDAQ:IONS) have all seen their share prices nosedive compared to their 52-week highs:
On a pure valuation basis, these three stocks actually look rather cheap, but the market continues to push them lower. AbbVie and Gilead, for instance, are both trading well below the sector average in terms of their forward price-to-earnings ratios. And Isis Pharmaceuticals' monstrous pipeline consisting of over 36 antisense drugs in clinical trials, with several being blockbuster candidates, makes its $7 billion market cap seem almost absurd.
In times like these, it can be hard to stick it out, waiting for moody Mr. Market to realize his wayward ways. That's why I like to take a deep breath when my portfolio tanks and bear in mind the sage advice of superinvestors like George Soros.
Soros reminds us all that market conditions can change in a flash
Although Soros' various political views have created a fair amount of controversy over the years, he is without a doubt one of the best investors that has ever walked the planet Earth. Specifically, he is presently the richest hedge fund manager and 7th richest American with an estimated net worth of $23 billion. So his views on how the market operates at a fundamental level shouldn't be taken lightly by the average investor, especially in emotionally charged markets like this one.
And one of the best takeaways from Soros' view of the markets in general is that a contrarian outlook is often the best approach to making money in stocks. This advice is summed up nicely by the hedge fund manager's now classic gem:
The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.
What he is referring to here is the natural tendency for markets to rip higher after a pullback, and the magnitude of the increase tends to far outweigh the former decline.
If we turn to the empirical research on the subject, studies have shown that the average rebound following a down year in the market is a whopping 20.2% rise in the price of equities!
Backing up this finding, it's fairly common knowledge that the broader markets have absolutely soared since the end of the 2007-2008 financial crisis that threatened to collapse the entire U.S. economy at one point, illustrated by the chart below:
So, unless something has fundamentally changed in how the market functions, Soros' insightful observation should be reason enough to stay invested for the long term.
How does this advice apply in cases like AbbVie, Gilead, and Isis?
If we take a long-term view of the market and don't let our emotions get the best of us, there is one glaringly simple reason to buy these stocks now: People aren't going to stop getting sick just because the stock market is cranky.
Most industrialized nations are seeing their average age rise at a rapid clip, and a larger proportion of individuals now have access to healthcare than ever before. What this means is that sales volumes for pharmaceutical products should continue to climb for the foreseeable future.
Perhaps pricing issues with payers and unfavorable currency exchanges will cause share prices for phama companies to dip even lower in the near term, but history shows the long-term trend is up.
And as Soros aptly states, the forthcoming rebound will more than likely compensate investors for the short-term pain. That's why I continue to buy all three of these stocks during their most recent dips, and think savvy investors may want to follow suit.
George Budwell owns shares of AbbVie, Gilead Sciences, and Isis Pharmaceuticals. The Motley Fool recommends Gilead Sciences and Isis Pharmaceuticals. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.