Spotting Investment Opportunities in Out of Favor Industries

Over the long run, stock markets are fairly efficient. In the shorter term however, valuations can go to extremes both on the low and high sides. Investors usually create these anomalies by piling into whatever is currently in vogue and indiscriminately selling whatever is out of favor. For example, in 1992, a bubble in the pharmaceutical industry popped. On average, drug stocks lost 40% of their value as growth slowed and profits began to erode due to increased discounting and generic competition. Another shoe dropped when the Clinton administration attempted to enact healthcare reform, and investors began questioning the long-term profitability of the pharmaceutical industry. In this article, we discuss an industry that is currently out of favor, creating opportunities (in our opinion) for long-term patient investors.