Biotech stocks took it on the chin at the end of March, with the biggest names in the sector losing ground in a hurry; the SPDR S&P Biotech (ETF) (NYSEARCA:XBI) crashed about 7.5% from March 19 to March 26, while the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) lost about 5% in the same period.
But there’s a school of thought that the pain we suffered across biotech stocks a few weeks ago was just a natural consolidation after big run-ups for many of these medical device companies and drugmakers.
That means it may be time to buy.
Biotech Stocks – No Strangers to Volatility
Consider that the one-year returns for both the IBB and XBI biotech ETFs are both about 39% vs. only 10% or so for the S&P 500 in the same period. Hardly seems like the sector is doomed when you take this longer-term view.
Click to Enlarge Heck, since the March lows, the IBB and XBI biotech funds have basically made back everything they lost; both up considerably — 19% and 26% respectively — since Jan. 1.
Investors should entertain the idea, then, that the drawback in some of the highest fliers is simply a buying opportunity as these red-hot companies cool off.
After all, we saw something similar to this in 2014.
From Feb. 21 to April 11 of last year, the SPDR S&P Biotech (ETF) lost about 20%, while the iShares Nasdaq Biotechnology Index (ETF) lost about 16% in the same period.
Since then? Well, the IBB is up 60% from those April 2014 lows while the XBI is up 76%.
A similar buying opportunity may have been created by the cooling off in biotech this year, even if it has been a more modest downturn that hasn’t lasted quite as long.
Therefore, investors who are looking long term at the potential of biotechnology stocks should remember their history.
What Biotech Stocks are Worth Buying?
If you just want to play the long-term uptrend in biotech, the IBB and XBI funds are great ways to do that. I personally prefer the XBI as a way to play biotech stocks because of its focus on smaller companies and its better diversification. Read my analysis of XBI for more details, or visit the fund’s official site for more details.
If you want to play individual stocks, be prepared for a bumpy ride even if the sector does bounce back. The bottom line is that many of the smaller biotech stocks can be very risky, particularly development-stage pharmaceutical companies with no real revenue yet and everything riding on one or two FDA trials.
Two decent-sized biotech stocks that could be worth a look for aggressive investors, however, are Biogen Inc (NASDAQ:BIIB) and Actavis PLC (NYSE:ACT) — two major players with market capitalizations over $100 billion and substantial profits to provide a measure of stability.
But closer look at the charts of individual companies hints that in addition to decent fundamentals, the worst of negative sentiment from earlier this year may be over as well.
Take Biogen, which hit a snag a few weeks back but has finally settled into a groove. The stock is no longer overbought based on RSI, volume has calmed down and BIIB stock hasn’t broken below its 50-day moving average despite the fireworks.
Click to Enlarge As for Actavis, the story is the same — after becoming a bit overbought on a run-up, the stock has settled down closer to its moving average and has yet to break through to the downside.
Does this mean these picks will take off tomorrow? Hardly.
But it’s important to remember that fast-moving stocks can’t drive higher forever, and there is a chance BIIB and ACT could bounce off their averages in the weeks ahead as buying pressure returns to biotech stocks after the dust settles.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.