The last several weeks have been rough for the overall market, but they’ve been particularly harsh on biotech stocks.
As of Wednesday, the iShares Nasdaq Biotechnology Index ETF (IBB) is down 15% from its mid-July peak, while the SPDR S&P Biotech ETF (XBI) is down 17% from its mid-July high.
That weakness from biotech stocks was rekindled in spades this week on the heels of an alarming stance from Presidential candidate Hillary Clinton, who vowed to fight the high cost of some specialty pharmaceuticals if she were elected to lead this nation.
For perspective, IBB fell 7.5% from Monday through Tuesday. All told, the IBB ETF is now off about 14% for the past couple of months.
Clinton’s comments notwithstanding (more on that in a moment), that is a big enough drubbing to force some investors to start viewing biotech stocks as undervalued bargains rather than liabilities. The question is, exactly where does one start to wade back into these names?
Forget Clinton
On the off chance you’ve not heard, Democratic Presidential candidate Hillary Clinton tweeted Monday:
“Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on.”
She was referencing a drug called Daraprim, which was recently acquired by a company called Turing Pharmaceuticals, which upped the price by 5000% before the deal was made.
In her defense, shame on Turing for the inexplicable price increase that capitalizes on the scarcity of the 60-year-old drug, and kudos to Clinton for being willing to take on Corporate America.
But, just for the record, even if she does win, her power to legally limit such practices are limited to bills she can actually get the House and the Senate to back. Good luck with that. She’s already relatively unpopular with politicians sitting on both sides of the aisle, and it’s unlikely she’ll be able to convince either chamber to go back and further upset a healthcare market that’s still waiting for all the dust from “ObamaCare” to settle.
So why promise something she likely won’t be able to deliver (at least not to any meaningful degree)? Simple … she’s a politician. She tells the voting public what they want to hear.
Meanwhile, biotech stocks have been getting punished, but it’s unlikely this week’s tweet and subsequent “plans” to lower specialty drug prices will be getting traction even just a month from now.
Sooner Than Later
So if the Hillary Clinton selloff is only a short-term affair, when are these names as a group poised to hit bottom?
First and foremost, forget about looking at these names through a fundamental lens, or at least not in the same way investors weigh other stocks. Biotech stocks are often outlandishly priced, and earnings estimates are barely more than a roll of the dice.
On the flip side, biotech stocks rise and fall together perhaps as much as, if not more than, any other industry. If the usual big-name leaders are hinting a bottom is made, then it’s a good bet the rest of the gang isn’t far behind.
For that reason, you’ll want to keep close tabs on charts of Celgene (CELG), Amgen (AMGN) and Gilead Sciences (GILD) from here. They’re the three biggest names of the IBB ETF, and the barometer for the rest of the industry.
With that said, biotech stocks are linked to the broader market (although they can and often do stand alone). When it hits bottom, odds are good biotech stocks will be hitting bottom around then too. If you absolutely must find the most likely major bottom for these stocks, though, keep a close eye on the chart of IBB.
As it turns out, the low of $284.16 IBB hit four weeks ago may not have been as much of a coincidence at it may seem at first glance. That was also a near-perfect 61.8% Fibonacci retracement of the rally seen between April of 2014 and July’s high.
Granted, another key Fibonacci retracement line — the 38.2% retracement — at $326.72 seems to be coming back into play right now, but one more capitulatory move would do biotech stocks some good. The $281 area is the most logical pullback point from here.
It’s unlikely the market would be willing to let these names slip much lower (if any lower), for one simple reason — at $281, the IBB ETF will be priced at a trailing price-to-earnings near 24. It’s not going to get much cheaper than that.
Ideally, this will all materialize within the next couple of weeks.
Bottom Line for Biotech Stocks
They can clearly fall out of favor from time to time, but biopharma and biotech stocks have proven some of the most reliable over time, specifically because they don’t suffer economic cycles and are rarely bumped around by political or economic volatility. When they are upended, though — as they are now — it can pay to think strategically rather than defensively.
In other words, it’s time to start making your shopping list.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
