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Monday, 27 July 2020

(Tradeview 2020) - Pharma vs Gloves. Is it Contradictory or Complementary?

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Dear fellow readers, 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :

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Coronavirus: How to encourage inoculation after a vaccine is developed

At first instance, my article title may appear plainly ridiculous. A 10 year old may even answer “If there is vaccine, demand for gloves are over!” However, not everything is so simplistic. A correlation does not equate conclusion. The reason I am writing this article is not to contradict anyone publicly but to share my humble point of view which I advised my private subscribers on why I chose to invest in Pharmaniaga, Duopharma, Ahealth, YSPSAH. DKSH was a long term value stock which has always been in our portfolio as far back as 2018. 

Now, the argument between Pharma sector vs Glove sector shouldn’t be look at superficially. If we think deeper, the glove & PPE is a form of preventive / protection medical gears supply. Vaccine and supplements are also a form of preventive / protection medical consumable supply. Both serve the same function to protect human from virus except one internally and one externally. So it is actually wrong to say having one means the other is unnecessary. 

Example : the common understanding is once a vaccine is found, the gloves sector is doomed because its redundant due to lack of demand. Gloves stocks share price will plunge and Pharma stocks will fly. This is also one of the reasons that a notable prominent investor came out to criticise when the Pharma sector limit up few days in a row. 

Why do I think this thinking is superficial? There are many counter arguments such as :

1. If there is mass vaccination, those administering will need gloves hence demand is still there.

2. Those who use gloves already won’t stop using just because a vaccine is found. This is because of “new normal” / “hygiene practice”. Various other sectors have adopted this best practice such as F&B.

3. There will be major need for stockpile replenishment by government and healthcare providers around the world due to the vacuum left by this pandemic. 

Moving on, I would go as far as to say the Pharma sector and Glove sector are complementary. So do not misunderstand my favour for the Pharma sector means I dislike gloves sector. Holding both is not contradictory. In fact it’s a great investment technique & diversification. It is both a symbiotic and hedge for one another. 

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Now the key reasons I recommended these 4 Pharma stocks to my private subscribers as far as few months ago was because the sector is 

1. defensive & stable with good yield
2. high barriers of entry & monopolistic 
3. potential for growth 

Let’s take Duopharma as example. It is a very good and well managed company. If you look at their long term trend and growth in share price, it’s been up trending since their demerger from CCM. Compared to Pharmaniaga which has performance risk and inconsistency, Duopharma is more steady. We also foresaw Duopharma and Pharmaniaga would be a major beneficiary for the MOH expanded funding during the pandemic, concessions agreement continuation and potential for future distribution of vaccines. This was my advice to my subscribers on 12th May 2020. 

As for Ahealth and YSPSAH, both are value stocks with strong earnings growth, good dividend yields and solid management with export markets exposure (forex gain). The share price is not overly demanding given its clean balance sheet and continuous growth in earning potential. It was simply a value worth investing. If tech sector can rally without earnings viability and justification going up to almos 150x PER, loss making penny stock moves because of unsubstantiated rumours, why wouldn’t such a good value stocks in the Pharma sector that contributes to the betterment of mankind demand better valuations? The pharma sector is simply a very stable growth sector. 

The reason why this sector became hot last week, went beyond my expectations. It is not like the vaccine is ready tomorrow or next month. I believe it was a good new trade idea for funds / retailers and thematic play which excites the market as this sector barely moved compared to US, China, Hong Kong, South Korea markets. Hence it was good that we held big position in this sector before the market took notice.

That’s why we entered earlier to hold for long term. It has always been our investment technique - to be contrarian, to enter when value emerges and to be forward looking. So last week was a pleasant surprise. 

As for gloves, do I still I like gloves? I do. Is the price high? Compared to what it was at the start of the year, yes. Will I put 80% of cash into gloves? No. But is there still any upside? Definitely yes.

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