1 Industry Withstanding Washington's Dysfunction

While we have no clue of the actions that politicians might make, which may hinder the performance of the market, gains to some degree will still be realized. Depending on the trend of the market, these gains could be difficult to identify. Yet, investors can give themselves a great advantage by understanding past performance and investing heavily in one particular space.

A market of uncertainty
Although it may seem like a distant memory, the first credit downgrade in U.S. history occurred in 2011, causing the S&P 500 to crash almost 250 points. Then, if you rewind just three years prior you'll recall the worst financial crisis since the Great Depression. During these two periods, nearly all stocks lost value, and almost all investors lost money.

Now, back to present day, we have our government (partially) shutdown and another round of debt debates that could be uglier than in 2011. The difference is that the S&P 500 is trading around 1,695, which is far greater than levels both before the recession and before the first credit downgrade in history.


The problem is that our economy is not yet strong; in fact, it remains very vulnerable to actions taken on behalf of Washington. Therefore, investors must hope for the best, prepare for the worst, and use the past as a guide for where to invest money.

Using history as a guide
As the debt debate draws closer and the markets tick lower, investors are faced with a tough question of where to invest money. The safest of investments such as Procter & Gamble, Clorox, Wal-Mart, and Johnson & Johnson, among others, have all traded with large gains in the last couple years. Thus, all trade with higher multiples and could be vulnerable to loss.

Instead of investing in these blue chip names, investors may want to migrate to the one industry that has shown strength over the last two major periods of market weakness: health care.

In 2008, Amgen, Celgene, and Gilead Sciences were among the top-performing stocks in the market. Then, in 2011, when the S&P 500 fell slightly, biotechs also dominated, as shown below:

Rank

Company

2011 Performance

1

Pharmasset

489%

3

Inhibitex

321%

4

Medivation

204%

6

Questcor

182%

9

Pharmacyclics

144%

10

Elan

140%

The first thing you should notice is that six of the top 10 stocks in 2011 were biotechs, and that many of the top performing stocks in 2008 and 2011 are still outperforming the market today. Right away, we notice a trend -- top-performing stocks are those acquired and are fast-growing small/mid-cap companies. Hence, using this as a guide, let's look at a few potentially intriguing places to invest if the market takes a turn for the worst.

Where to invest?
In the chart above, three of the six companies have been acquired, and for this reason the speculation and possibility of either Jazz Pharmaceuticals and Alkermes look attractive to me.

Elan was acquired earlier this year for a whopping $8.6 billion for both its royalty on sales of Tysabri and because of its tax rate. In the U.S., the corporate tax rate is 35%, but in Ireland it is 12.5%. Both Alkermes and Jazz have been at the epicenter of acquisition rumors, and low tax rates could be a factor keeping these stocks on the acquisition block.

Moreover, Alkermes has annual revenue of $560 million and a large pipeline. Jazz has revenue of $760 million and top-line growth in excess of 65%. So, both companies have a lot going for them even if investors' buyout dreams don't materialize.

Then, there are stocks with catalysts -- promising clinical products expected to earn FDA approvals in the near future, like where Pharmacyclics and Medivation stood in 2011. This year's version of those two stocks are Celldex Therapeutics and ACADIA Pharmaceuticals

One of Celldex's drug candidates successfully extended life and shrunk tumors in the most difficult of breast cancer patients, those who were no longer responding to other treatments. But this biotech is not a one-hit wonder. Celldex continues to develop its brain cancer drug in late stage trials, and has other early stage oncology assets as well, making the $2.3 billion company a stock with the potential to outperform regardless of market conditions.

ACADIA's flagship drug candidate is pimavanserin, an anti-psychotic that reduced psychotic episodes without harmful side effects in patients with Parksinson's disease psychosis. With an expected FDA approval late next year, investors now speculate about off-label uses and blockbuster status.

What's encouraging about the anti-psychotic market is that many drugs are in fact used off label, yet pimavanserin will be the first FDA approved drug to treat many of these indications. And because of pimavanserin's clinical benefit, many believe ACADIA is a great takeover target. With a market cap of $2 billion, again there's a lot to like regardless of market trend.

Final thoughts
In tough economic environments, it is important to have a diverse portfolio, and biotech has shown that it can buck the down trends of the broader market. While these four stocks may not be suitable for everyone, in my opinion, they are a good place to start.

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The article 1 Industry Withstanding Washington's Dysfunction originally appeared on Fool.com.

Brian Nichols owns shares of Acadia. The Motley Fool recommends Celgene, Gilead Sciences, Johnson & Johnson, and Procter & Gamble. The Motley Fool owns shares of Johnson & Johnson. 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.

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