Politics is the hot story of January, but health care might be the hot trade.
A handful of health care companies have historically exhibited significant price swings in the first three weeks of the year, according to Goldman Sachs research. Tuesday’s special election in Georgia—which will determine the political party that controls the U.S. Senate—only heightens the potential price volatility.
Goldman’s hot health care list includes Medtronic (MFT), Eli Lilly (LLY), HCA Healthcare (HCA), Stryker (SYK), Boston Scientific (BSX), Danaher (DHR), Intuitive Surgical (ISRG), Regeneron Pharmaceuticals (REGN), Vertex Pharmaceuticals (VRTX), Neurocrine Biosciences (NBIX), Teladoc Health (TDOC), Horizon Therapeutics (HZNP), Alnylam Pharmaceuticals (ALNY), Amicus Therapeutics (FOLD) and Sarepta Therapeutics (SRPT).
According to Goldman Sachs, which notified clients of the potential opportunities on Dec. 30, the group of 15 health care stocks that have been identified have moved up or down an average of 11.4% between the start of the year and January expiration. During the same period in January, the Health Care Select Sector SPDR exchange-traded fund (XLV) has moved 3.9%, up or down, and (SPY) has moved 3.8%, up or down.
To play the volatility, Goldman Sachs advised clients to buy so-called straddles on the hot-stock list. A straddle is an investment strategy that entails buying a put and call with strike prices that match the stock price and that have the same expiration. The straddle is designed to increase in value if the stock rises or falls.
The reasons for the health care moves are attributed to earnings pre-announcements, and January’s popularity for health care conferences. Goldman Sachs, for example, is hosting a health care conference Tuesday. Companies often use the conference to offer financial disclosures, provide updates around critical drug trials, and discuss strategic initiatives.
Moreover, January has been an important month for the health care sector since 2011 as 43% of all earnings pre-announcements have been made during the first three weeks of the year.
Consider Sarepta as a way to shape the trading menu to your purposes.
The company is expected to soon report more data that is needed to help evaluate a microdystrophin gene therapy for Duchenne muscular dystrophy. Goldman Sachs biotechnology analyst Salveen Richter sees the potential for the stock to trade up double digits if the company meets the trial’s co-primary endpoint.
Goldman’s analysis expects a 30% to 40% upside for the stock, or a 40% downside, compared to the current stock price, should the trial produce good or bad news.
Goldman Sachs’ derivatives strategist advised clients to buy Sarepta’s April $175 calls that cost $38.20 when the stock was at $171.82. The stock has since declined to about $165 and the calls are trading around $34.
During the past 52 weeks, Sarepta’s stock has ranged from $78.06 to $181.03. The stock is up 28% over the past year.
For Goldman’s trade to truly payoff, Sarepta’s stock will have to move into a new, higher trading range. The trade’s break-even—strike price plus options premium—is $213.20. At $245, which is about 40% above the call’s strike price, the call would be worth $70.
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