Despite lofty performance and the (false) feeling that biotech stocks are a crowded trade, they’re still the place to be for significant performance. Year-to-date, the SPDR S&P Biotech ETF (XBI) is beating the S&P 500 handily as the biotech ETF is posting nearly 40% gains.
Click to Enlarge Despite the alpha-crushing performance, the biotech sector ranks as one of the “most hated” group of stocks out there, according to our proprietary ETF Composite Weighted Short Interest Ratio. Current readings of this ratio register 8.1; the same measure for the S&P 500 currently reads 3.1, making a pretty clear case that the biotechnology sector remains “uncrowded” and ripe for more gains.
While the argument for biotech stocks strong, it is becoming clearer that buying the right stock within the sector is becoming more important than it was six months or a year ago. According to our breadth measures, the biotechnology sector is starting to see a lot of “performance splintering,” or divergence among the individual companies within the sector. This means we will start to see more losers and fewer winners as the tide apparently is done lifting all of sector’s boats.
The table above identifies a number of biotech stocks that our research suggests will continue to lead the market higher. Here are three that we especially like right now.
Biotech Stocks to Buy: Immunogen (IMGN)
Immunogen (IMGN) develops anticancer therapeutics. The company’s earnings results have been volatile over the last three years, but growing revenue looks to right that ship. The technical picture is incredibly attractive as our Behavioral Scoring system ranks the stock as a “5” — the highest score a stock can get.
High short interest and low analyst rankings suggest that IMGN will continue to climb the “wall of worry” through the second half of 2015, setting itself apart as a leader in the sector.
Our current target for IMGN shares lies above the $20 level, another 15% move from today’s price.
Biotech Stocks to Buy: Cepheid (CPHD)
Cepheid (CPHD) is a molecular diagnostic company that develops and manufactures systems for testing in clinical and non-clinical markets. The stock dropped 13% on Friday after a disappointing EPS result … but equally important is the revenue beat and outlook that the company gave.
Also aiding the short-term picture is the large amount of short interest, which will start to unwind as traders cover their positions. This should add to the buying power for CPHD shares.
In all, we see the latest blip as just that — a blip. CPHD will be trading back toward its highs and towards the $70 before the end of the fourth quarter.
Biotech Stocks to Buy: Seattle Genetics (SGEN)
Seattle Genetics (SGEN) is another cancer therapy company, specializing in antibody-based therapeutics. SGEN maintains a streak of beating earnings estimates every quarter since 2011 while growing revenue by an average of 180% each quarter (year-over-year).
Despite the stellar performance, both fundamentally and technically, Seattle Genetics finds itself in the “most hated” category for biotech stocks as the current short interest ratio on SGEN comes in at a lofty 26.3 and the current analyst recommendations show only 54% of the analyst community covering the stock with a “buy.”
SGEN will shoot beyond its peers in the second half of 2015 as the bears eventually turn to buyers, moving toward a $60 price target before year-end.