Biotech is one those sectors that can absolutely kill it compared to the broad market, or get killed when times are tough. Biotech stocks have been a favorite of fast money, too, since it moves faster than the Standard & Poor’s 500 – in both directions.
Currently, it is getting a lot of media attention and pundits are just now noticing that the exchange-traded funds (ETFs) tracking it are up 26% year-to-date compared to just 10% for the S&P 500. However, that’s not the end of the story. Biotech is set up for another run of equal size thanks to innovations in cancer treatments, genomic mapping and digital medicine.
That creates two classes of biotech stocks and one of them is fraught with near-term risk. Some stocks, such as Vertex Pharmaceuticals (NASDAQ:VRTX), are already up triple-digit percentages this year. And not only that, this stock seems quite expensive based on its trailing price/earnings ratio of 150.
The other class — the one investors should like — contains stocks that have not been superstars but are just now starting to make their moves higher. These stocks may be reversing their own private bear markets and are turning around to the upside.
Or, they may be emerging from long trading ranges where uncertainty previously ruled. They are changing that uncertainty into investor demand and that can drive the stock price higher for months to come.
Amgen (NASDAQ:AMGN) is a biotechnology medicines company, and its stock has gone nowhere for nearly three years. It stalled in late 2014 and while it created good short-term opportunities for traders it was not kind to long-term investors at all.
However, the stock’s condition changed for the better earlier this year when it failed to trade to the bottom of its long range. Why? Because bullish investors started to believe in the stock and bought shares before prices fell too far. That suggests demand for shares.
That demand was unleashed Monday as Amgen led the biotech sector higher with a 3.2% gain, which can be partially attributed to announced results from the Phase 3 ARCH study showing that its Evinity drug successfully aided other therapies in reducing new vertebral and hip fracture risk in postmenopausal women with osteoporosis at high risk for fracture.
The move also created a long-term upside breakout from the trading range and that suggests a lot of pent up buying will be unleashed.
Biogen Inc. (NASDAQ:BIIB) focuses on developing therapies for neurological, autoimmune and hematologic disorders. This is another big biotech stock that disappointed investors for years before finally waking up late last month. The stock surged following results from an Alzheimer’s drug study.
From an investing point of view, what was once a dead-in-the-water stock now looks poised to rally 25% to get close to its March 2015 all-time high. Of course, with a stock this big – $69 billion market capitalization – that will take some time.
Puma Biotechnology (PBYI)
Puma Biotechnology (NASDAQ:PBYI) shares soared 20% on May 24 after FDA advisory committee voted to approve its breast cancer drug. If we only look at it with a short-term trading eye we might say it is too late to buy. However, when we pull back to the big picture we will see a few very important – and bullish – features on its chart.
The first is the 70.25 level which had significance on several occasions over the past few years. In 2014, investors thought that level was cheap and they stopped selling. That was a good plan because on July 23, 2014, shares more than tripled in after-hours trade after the company reported – for the first time – positive results from a late-stage trial of its breast cancer treatment.
But it would not last. In 2015, the stock slid all the way back to its prior levels and the news included such items as a delay in filing a marketing application its cancer drug when the Food and Drug Administration demanded changes in how study data was analyzed. Volatility rules in this sector.
Getting back to the positive, the jump in May of this year was quite different from the 2014 jump. This time, the stock moved above a trading range established over the past two years. And in August, it traded down to let late bulls buy at the original breakout prices. They took advantage of the opportunity. It also proved that the breakout was real and now with the stock at multi-year highs the trend is clearly to the upside.
iShares Nasdaq Biotechnology Index Fund (IBB)
The iShares Nasdaq Biotechnology Index Fund (NASDAQ:IBB) is an exchange-traded fund that tracks more than 160 biotech stocks trading on the Nasdaq. It should be noted that the top 10 holdings represent almost 60% of its weight so the large number of component stocks is somewhat misleading.
However, it still provides a good way to participate in the biotech rally without as much single stock risk.
This ETF also shows a breakout from a long period of malaise. It also shows the “second chance” for late bulls to buy the correction last month.
Similar to the stock above, the ETF has a good chance to recover to its prior all-time highs set in 2015.