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Why You Should Believe (and Buy) the Current Rebound in Biotech Stocks

In the past month, biotechs have been leading the market’s rally, with the iShares NASDAQ Biotechnology Index ETF (IBB) and the Nasdaq Biotechnology ETF (NBI) each gaining around 6%.

Why You Should Believe (and Buy) the Current Rebound in Biotech Stocks

Cue a collective sigh of relief from biotech fans.

That rebound admittedly hasn’t been enough to recover all the losses from the panic that began back in mid-July. But it’s a definite step in the right direction, and I’m confident this is just the beginning of the sector’s full recovery and continued upward momentum.

First, let’s recap the bad times. As I explained about a month ago, biotech stocks suffered a major decline on the back of pricing concerns.

This summer, controversy surrounded Turing Pharmaceuticals after CEO Martin Shkreli dramatically jacked up the price of one its drugs, and Valeant Pharmaceuticals (VRX), which has a business model of acquiring supposedly underpriced drugs, was called out for the same.

Democratic Presidential candidate Hillary Clinton tweeted about price gouging in response — one of a few reasons investors soon became skittish on the sector.

But as I mentioned already, that was hardly the first time pricing concerns surfaced in the sector. It actually marked the fifth time since 2009 that small-cap biotech stocks have entered a bear market.

Put another way, it comes with the territory … but it also marked a huge buying opportunity.

That reality has just started to come to fruition thanks to acquisitions, earnings beats and strong outlooks in the biotech sector. Irish drugmaker Shire (SHPG) announced the acquisition of Dyax (DYAX) for $5.9 billion, for one, while AbbVie (ABBV) and Gilead Sciences (GILD) — two of the biggest names in the space — each reported strong third-quarter results.

I mentioned GILD a month ago as an appealing bargain in the sector: It was trading for just 8 times forward earnings and 10 times trailing earnings, but had 17% per year growth on tap. That growth potential showed in the company’s third-quarter report. GILD’s profit expanded by 70% and the company raised its full-year guidance. And shares are up nearly 10% in the past month — impressively outperforming the upward-climbing sector and market.

Similarly, ABBV didn’t just beat earnings estimates thanks to strong sales of its main drug Humira, but also raised its Q4 guidance. AbbVie — which was especially beaten down thanks to some not-so-hot headlines about its Hepatitis C drug — has come roaring back even more, pocketing 10%-plus gains in the past month.

Add it up, and the biotech sector is a great example of the opportunity that exists for those who don’t panic and focus on the fundamentals. The selloff in biotech stocks was built on hype and fearmongering headlines, while the rebound is being built on actual earnings and value.

And that’s precisely why I expect that rebound to continue.

Despite the recent recovery, there’s still plenty of room to run for biotech stocks — and there are plenty of promising picks in the sector to choose from.

Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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