Grading 2 Pharma Stocks That Are Heating Up as Large-Cap Rivals Falter
While large-cap pharma stocks disappoint, these lesser-known names are gaining strength.
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The major indexes are trading near all-time highs, but not every sector has participated in the ongoing rally.
The pharmaceutical sector is one area of the market that has failed to gain momentum. Despite strength in the overall market, pharma investors have had their shares of disappointment.
One exchange-traded fund that can be used to represent the sector is the S&P Pharmaceuticals ETF (XHP). This ETF contains well-known industry stalwarts such as Merck MRK and Johnson & Johnson JNJ.
More Downside for Eli Lilly?
Over the past four years, large-cap pharma has been a misery pit for investors. During that time, the XPH ETF has provided an overall net negative return:
2021: -10.53%
2022: -9.83%
2023: +2.96%
2024: +4.95%
Over that stretch, one of the names that has buoyed this sector was Eli Lilly LLY. Lilly shares have advanced by 328% over the past five years, mainly due to the popularity of GLP-1 weight loss products like Zepbound.
However, the bloom is off Lilly, as shares have declined sharply in recent weeks. Lilly has fallen from a descending triangle pattern (dotted lines), due to disappointing trial results for the company’s new oral weight loss medication, orforglipron.
Based on the stock’s bearish pattern and momentum, shares of Ely Lilly could fall to the $535 area.
Good News for the Pharma Sector
Despite this negativity, there is hope for the pharmaceutical sector. The aforementioned XPH ETF broke out on Monday, and is flirting with a four-month high. XPH is now trading above its 50-day (blue) and 200-day (red) moving averages, as some lesser-known names are pulling it higher.
Two Hot Pharma Names
One of the names pushing the sector higher is Elanco Animal Health ELAN. Elanco, a former subsidiary of Eli Lilly, climbed to a 52-week high on Monday.
Greenfield, Indiana-based Elanco is the third-largest animal health company in the world, and produces a variety of products aimed at fleas, ticks and other parasites. The company has a market capitalization of $8.5 billion.
GRADE: B+
Meanwhile, Tarsus Pharmaceuticals TARS has a market capitalization of just $2.1 billion. Tarsus shares have gained nearly 20% in the past week, despite reporting a wider-than-expected loss last Wednesday.
Irvine, California-based Tarsus produces xdemvy, an FDA-approved eye treatment. After ripping through its 50-day (blue) and 200-day (red) moving averages, the stock is struggling to break above a bearish trendline (green dotted line).
GRADE: B-
Bottom Line
I’m buying Elanco now. I plan to add Tarsus if and when the stock breaks above its trendline and above its prior high. I'm looking to enter Tarsus near $52.
At the time of publication, Ponsi was long ELAN.
