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Pharma- The Dead Horse

August 10,2016 Stallion Asset Blog

“Tell Me where i am going to die so i wont go there” – Charlie Munger

Stallion Asset is in the business of creating Wealth for its client and that’s my only goal. Today’s Blog Is not about Creating wealth, but about what Not to do. We have a clear Avoid in One sector and we believe you should stay away from it.

The Sector i am speaking about is Pharma. Pharma companies are priced as defensive but actually there are many risks especially from US FDA. We cannot buy Pharma and go off to sleep anymore. The risk premiums for these companies should only increase and take these stocks 20-30% lower from Current level.


I am going to Highlight the technical part of the report in this Blog. Here is the Weekly Chart of CNX Pharma Index Below.



There are Two Factors that i base my Thesis on i.e. Technical and Psychology.

Technical –

The Pharma Index was a laggard in previous bull market of 2003-2007 where the nifty went up 6x from 1000 to 6300 but the Pharma Index went up only 3 times in that bull market. After the 2008 crash the Pharma Index Bottomed Out in 2009 at 2000 levels and was the first index to breakout in 2009 breakout out above its 2008 high. The Pharma Index Went up 7 times between 2009-2014 to reach a level 14000. The Most important thing was that the Index didn’t even correct once more than 13% in 6 years showing how Strong Trends are.

In 2015 Pharma Index corrected 19% showing clear Indication that the sector Bull Market is over. Pharma Index started its bull market in 2009 at around 2000 level has returned 38% CAGR in last 6 years to 14020 levels. The Sector is clearly overbought by Investors.

I Have seen no two consecutive bull markets have the same sector go up since inception of sensex in 1979. The Same thesis is of the research on 100 years of US market has been given in journal of Finance by a Professor of Yale. So in the next bull market we expect pharma to significantly underperform.

I have been a Buy Side for most of my professional life, and i understand there is no thing as certain in markets, we are dealing with probabilities.We think there is a large probability of that the Pharma game is over.

Psychology- Meaning of Defensive – Defensive means stable company during various phases of business cycle. Well i have no visibility of earnings anymore as 1-2 mistakes can erode my portfolio by 30-40%. I don’t know what a pharma company would look like 3-5-7 years from today. People are treating it as defensive stock when its clearly not.

Conclusion – Levels around 12091-12205 seems to be extremely strong resistance points. If we estimate a 50% retracement of the whole upmove, our target for the Index would be around 8000 levels which is 30% lower than what we are today. I cant say if those targets will come or no as i don’t like to predict the market. What i can say for sure is that there are many Fundamental, Technical and Psychological reasons for Pharma to Underperform.

Also Read Our Blog The Most Important Thing.


Disclosure – I have zero Exposure to Pharma Companies

Stallion Asset is Registered with SEBI under Research Analyst act 2014(INH000002582). Please Use this Report For educational purpose only. We wont be responsible for an loses faced by the User.

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