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Some say "no' to drug stocks

While many other Wall Streeters are applauding signs of an improving economic outlook, followers of blue-chip drug stocks aren't so overjoyed. Ever since "recovery fever" hit the market a few weeks ago, the shares of prominent pharmaceutical manufacturers have endured a rare bout of disfavor among investors.

Consider the last week of May, during which the Dow Jones average of 30 industrials soared 113.59 points to a record high on evidence that the recession might at last be nearing an end.

That same week, Dow Jones' index of pharmaceutical stocks dropped 1.66 percent, to rank dead last among the 82 industry groups tracked by the publishing company.

It will take a lot more than one bad week to tarnish the drug stocks' record of many years as standout winners in the market.

But the recent flow of money out of the group at least has raised some questions about how long these stocks can keep up the showing they have managed during the past decade or so.

"Aggressive traders may just say no to drug stocks," Barbara Dreyfuss and Barbara Ryan, analysts at Prudential Securities, said in a report issued last week.

Most observers agree that nothing major has happened to disturb hopes for a continuation of many drug manufacturers' impressive earnings growth.

The main stumbling block right now, they say, is a fear that drug shares might start losing some of their popularity to stocks in cyclical industries that have more to gain should the economy keep gathering momentum.

As the Prudential analysts observed, "a rotation from defensive growth to cyclical stocks is already evident."

A few other clouds are on the horizon. For one thing, any move to revamp the health care system in this country could hurt drug industry profitability if it concentrated bargaining power for prescription drugs in the hands of the government.

Also, individual drug stocks are almost always vulnerable to adverse news about sales or test results of any of their products.

But beyond such caveats, some analysts argue that the current pullback presents a buying opportunity, especially should recovery from the recession prove to be only slow and grudging.

"We continue to believe that the market may be disappointed by the dimensions of the economic recovery," said Jack Lavery, director of global research at Merrill Lynch. "We advise against chasing the advance in consumer-cyclical stocks.

Instead, he advocates "industries that should benefit from long-term trends such as the aging of the population. Drug stocks, which fall into that category, should benefit from demographic trends here and in Western Europe and Japan."

In the ranking system maintained by the Value Line Investment Survey to forecast the stock market during the next year, the drug group holds the No. 1 ranking among almost 100 industry groups.

"When it comes to consistent earnings growth, few industrial concerns, if any, can match the sterling record of the major drug makers," Value Line says.

"Given our expectation of a relatively anemic economic recovery, we believe that drug companies' predictable earnings patterns, low risk of disappointment, and the stocks' defensive characteristics _ including high marks for safety and price stability _ will continue to make the industry a good place to invest during the coming year."