If the stock market’s recent volatility has left you feeling sick, you might think about adding some biotech stocks to your portfolio.
Given the amount of attention paid to Covid-19 treatments and vaccines, it would be easy to assume that all of the good news was already reflected in biotech stocks. That’s not quite the case. While they were the stars early in the market’s rebound—the iShares Nasdaq Biotechnology exchange-traded fund (ticker: IBB) surged 37% from March 23 through May 11—they have gone nowhere for the past six weeks.
They now look ready to run again. “From compression comes expansion,” writes Jonathan Krinsky, chief market technician at Bay Crest Partners. “This is exactly what you want to see if [you are] bullish.”
First, a history lesson. It wasn’t that long ago that biotech was hotter than, well, tech itself. From the financial-crisis low on March 9, 2009, through July 20, 2015, the iShares Biotech ETF gained 586%, outpacing not only the
215% gain, but also the Technology Select Sector SPDR ETF’s (XLK) 268% rise, as well.
Then it all came to a stop. Since that 2015 peak, the iShares Biotech ETF has basically gone sideways. And it isn’t hard to see why. That was around the time
(GILD) cured hepatitis C. It was an amazing feat of science, but it raised two new concerns for investors. First, there were worries about where the next big thing would come from. Second, Gilead’s treatment was so expensive that drug pricing became a political issue. Against that backdrop, biotech stocks as a group seemed like a bad bet.
Covid-19 has changed the conversation. Biotech companies have been working to find treatments for the illness, helping to change their perception as purveyors of high-priced medicines, some of which do little good. The disease has also accelerated the process by which new drugs are developed and approved, something that might have taken years precoronavirus.
That has been a boon for companies like Moderna (MRNA) and
(NVAX), helping biotechs demonstrate that their platforms, whose value had been largely theoretical, might be worth something. And breakthroughs in non-Covid-19 areas continue apace. Just this past week,
(CRSP) announced progress in treating sickle-cell disease, while
stock (LLY) gained 11% after it announced positive late-stage trial results for its breast-cancer drug Verzenio.
SPDR S&P Biotech ETF
(XBI) might be the best to play the trend. Unlike the iShares Biotech ETF, it is equally weighted, which means that smaller companies are given greater heft than in its market-cap-weighted competitor. Practically, that means the iShares ETF is more defensive—it lost 21% from the S&P 500’s peak on Feb. 19 through its low on March 23 to the SPDR ETF’s 30% decline. But the SPDR ETF should outperform on the upside, says Evercore ISI’s Rich Ross.
Just because the biotech group might be ready to break out doesn’t mean all biotech stocks are. Case in point:
(BIIB). The biotech giant dropped 3%, to $271, this past week after losing a court battle—and the patent for multiple-sclerosis drug Tecfidera, its biggest seller. The bull case for Biogen now rests almost solely on its Alzheimer’s treatment aducanumab. “We think greater than 50% probability of approval due to political pressure,” writes Jefferies analyst Michael Yee.
The stock could be worth $500 if aducanumab is approved, and as little as $175 if it is not and Tecfidera is lost. Yee has a Hold rating on Biogen; he’s one of 13 analysts of the 24 covering the stock to have no real opinion as to whether to buy or sell. Normally, we’re not fans of the middle. In Biogen’s case, it might actually make sense.
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Write to Ben Levisohn at [email protected]