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Hello, Reader.
If your family includes millennials and Gen Z-ers, you’ve probably heard one word thrown around a lot: “hype.” They use it to talk about something exciting, energetic, or highly anticipated.
But between the 1910s and 1920s, long before it entered the lexicon of youthful enthusiasm, hype referred to the grift a con man might use to swindle or overcharge customers.
And by 1967, the meaning had evolved to signify “excessive or misleading publicity or advertising.”
These past definitions all express forms of deception, which is exactly how hype operates in the stock market. It tempts investors to “chase stocks” that are already wildly popular.
For brief periods of time, hype-chasing can produce huge gains. But hanging onto this gains is not easy. Once they hype dies out, stocks usually plummet quickly. During the last three years of the dot-com boom, for example, Cisco Systems, Inc. (CSCO) soared more than 1,300%! But just one year after that peak, the stock had collapsed more than 80%…and did not regain its peak price until this year, 26 years later.
Today, artificial intelligence is unquestionably the most “hype” topic in the stock market…which is why investors are climbing over one another to throw money at “AI darlings.” Even Cisco is on that list again!
Many investors have abandoned previously held sectors to chase the AI gold rush, leaving behind one particularly “underhyped” sector:
Healthcare.
In today’s Smart Money, I’ll explain how the hype surrounding the AI trade is diverting attention from potentially lucrative pharmaceutical stocks.
And why that disconnect, along with several promising developments, could make now the right time to take another look at the sector.
Let’s dive in…
How the AI Trade Left Healthcare Behind
Popular ways to profit from the rise of AI include investing in its infrastructure, data centers, and the energy and semiconductors needed to power them.
Nvidia Corp. (NVDA), the most popularly held chip company,has leaped 1,255% since November 30, 2022, when ChatGPT first hit the scene and forever changed how we use technology and AI…
Vertiv Holdings Inc. (VRT), which brings computing services and cooling solutions to data centers, has surged 2,579% since then…
Lumentum Holdings, Inc. (LITE), which supplies photonic solutions to data centers, has jumped 1,658%.
All while the iShares Pharmaceuticals ETF (IHE) has grown just 43% during that same stretch. Compared to AI and mega-cap tech stocks, that doesn’t look so hype.
Pharma stocks haven’t participated in the same speculative excitement as their AI counterparts. The NYSE Arca Pharmaceutical Index is trading for just 16 times forward earnings, which is barely half the valuation of the Nasdaq Composite Index of 29 times.
Healthcare has historically commanded a premium or near-market valuation, driven by steady demand, consistent cash flows, aging demographics, and resilience during recessions.
However, Barron’s noted last summer that those stocks were trading at some of their cheapest relative valuations versus the broader market in roughly 30 years.
And they still are today… because investors have been selling them to buy AI-related stocks instead.
But healthcare stocks‘ earnings remain quite steady, while valuation multiples experienced a significant squeeze. As a result, they didn’t perform as well, even though profits stayed strong.
This change has led healthcare stocks to trade at a discount – making them more appealing given their growth potential.
However, where you invest in the sector is still important…
Where AI Is Actually Helping Healthcare
It’s important to note that cheap valuations do not automatically make for good investments.
There are several other reasons why pharmaceutical stocks are trading at discount levels right now, including ongoing uncertainty around government policy and healthcare regulation.
The current environment at the Department of Health and Human Services, combined with broader debates over vaccine policy, drug pricing, and Medicare reform, has made investors cautious.
At the same time, however, AI has helped create powerful new growth for select healthcare companies – particularly those using AI to accelerate and optimize the drug-discovery process.
An article from the World Economic Forum published earlier this year explains how AI is transforming three key stages in drug discovery:
- Identifying disease targets (changing how biopharma identifies the biological drivers of disease),
- Generating compounds (leveraging generative AI to create more molecules),
- And predicting safety (by curating and analyzing historical data).
The pharmaceutical industry has officially entered the Age of AI, and no major drug company wants to be left behind. Collectively, it recognizes AI’s potential to revolutionize the drug-discovery process.
This is especially true as agentic AI further transforms the healthcare space.
Just this week, Owkin, an agentic AI company that develops AI tools for drug discovery and pharmaceutical research, said that it’s expanding its partnership with pharma giant AstraZeneca PLC (AZN) to build specialized AI agents for AstraZeneca’s research teams.
The push toward semiautonomous AI agents running parts of the pharmaceutical workflow is still in its early stages, but I expect the trend to grow significantly.
This transformational technology could both improve the plight of humanity and enrich forward-looking investors.
But betting on a hit-or-miss biotech company driven by unchecked AI hype may not be the best way to capitalize…
The Risk-Reward Play Worth Watching Now
Instead, at this stage of the opportunity, select large-cap drug companies may offer better risk-reward profiles.
I want investors to focus not just on growth, but on profitable companies with more defensive characteristics – especially as the hype around agentic AI grows.
That’s why I have my eye on one particular pharmaceutical trade.
You can find information for this healthcare play inside my Three Accelerator Trades for the Agentic Reckoning report, where I outline a total of three trades designed to accelerate gains from companies successfully leveraging agentic AI.
Learn how to access this report by clicking here.
You’ll be taken to an important presentation where I explain some of the best ways to navigate the current AI landscape, especially as agentic AI gains prominence and the excitement surrounding it clouds investors’ judgment.
During my presentation, I also give away my No. 1 stock pick for free – a company that is widely applying AI across a wide range of industries, including automation, the service business – and even healthcare.
Click here for all the information.
Regards,
Eric Fry
