Reader Maura K. recently wrote in:
"Hi Rudy — I know you like the biotech space. I generally have a pretty high tolerance for volatility, but lately the press is making me second-guess my current biotech holdings. What’s your take on it?"
Thanks for the timely question, Maura. My short answer is that, yes, I believe there are more gains — potentially huge ones — to be made in this space.
In fact, I recently recommended that my Global Trend Traders grab gains in the iShares Nasdaq Biotechnology Index ETF (IBB), to the tune of 22.69% in total returns in the space of just three months.
But with its chart rapidly stair-stepping lower, biotech is on my "hate to love" list right now. Here’s why …
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IBB has surged more than 60% in recent months. The ETF has primarily been driven by the "Affordable Care Act," new acquisition and buyout deals, and an ever-expanding aging population.
- The ACA has increased, and will continue to increase, the demand for healthcare coverage.
- Acquisition deals and buyouts allowed the biotech industry to surge.
- An aging population continues to affect the biotechnology sector. The elderly are boosting the demand for each company’s respective drugs.
These are all great things that bode well for the long-term future of these stocks. Yet, clearly the market has been piling in on these names.
And with the shift in momentum to lower-valued financials, this group is now getting clobbered.
One look at the chart for the iShares Nasdaq Biotechnology Index should be enough to tell the story — stay away from biotechs right now.
But Don’t Wander Too Far Away …
I like IBB — just not right now.
After all, this $5.5 billion ETF provides exposure to 123 companies at a modest 0.48% expense ratio. No wonder it’s one of the most-popular ETFs, and the largest in its space.
If there is a recovery in these stocks, the better way to play it may be to keep up with the stories and developments that could make individual names real movers.
Below are IBB’s top 10 holdings, which equal 56% of this fund’s total assets:
- Biogen Idec (BIIB): Biogen has a market capitalization of $81.70 billion. The company currently has an annual earnings-per-share (EPS) of 7.81, with a price-to-earnings (P/E) ratio of 44.82.
The FDA recently notified the company that it is extending the review period for BIIB’s multiple sclerosis drug candidate by three months, which investors weren’t happy about. The stock is trading in the $307 area, as of this writing.
- Gilead Sciences (GILD): Gilead Sciences has a market capitalization of $117.74 billion. The company currently has an annual EPS of $1.81 with a P/E ratio of 42.29. The stock is trading at $71.
Patent battles over its blockbuster Hepatitis C treatment Sovaldi also continue to heat up. Sovaldi is expected to beat Pfizer’s trophy drug Lipitor in sales, with forecasts of $5 billion in just its first year on the market. (Lipitor brought in nearly $13 billion for Pfizer.)
- Amgen (AMGN): Amgen has a market capitalization of $95.57 billion. The company also has EPS of $6.64 with a P/E ratio of 19.06. Amgen continues to present positive data on its PCSK9 cholesterol drug. It is currently trading at $122.
- Celgene Corp. (CELG): Celgene has a market capitalization of $61.24 billion. The company currently has annual EPS of $3.37.
Pancreatic cancer is becoming the third leading cause of cancer death in Europe. With this in mind Celgene has announced plans to test on 4,800 patients. The stock closed slightly lower yesterday, ending near $142.
- Regeneron Pharmaceuticals (REGN): Regeneron has a market capitalization of $32.65 billion. The company currently has annual earnings per share of $3.81.
The company has skyrocketed within these past three months, beating Biogen Idec, Amgen, Gilead Sciences and Celgene. Despite this rally (it’s currently trading at $310), Citigroup is saying that it is still the right time to buy this stock.
- Illumina (ILMN): Illumina has a market capitalization of $20.72 billion. The company has annual earnings per share of $0.90.
Illumina is a leading innovator for next-generation sequencing (NGS) equipment and is drastically reducing the costs of NGS equipment. NGS should prove to be a major breakthrough for cancer and genetic disease research.
As NGS becomes more affordable, its applications will be used by everyday individuals rather than a few labs. ILMN shares are trading near $143.
- Alexion Pharmaceuticals (ALXN): Alexion has a market capitalization of $34.80 billion. Its EPS is $1.27 and it has a P/E ratio of 138.52. The biopharmaceutical company has lifted its outlook for 2014 following a reimbursement deal with France on Soliris, which is used to treat blood, kidney and related disorders. ALXN is currently trading at $151.
- Mylan (MYL): Mylan has a market capitalization of $19.82 billion. Mylan has earnings per share of $1.58 and a P/E ratio of 33.73. Of this list of biotechs so far, it’s the least-expensive on a dollar basis, at $48 per share.
The company has a number of strengths including skyrocketing revenue, increasing cash flow and decent debt. Shareholders have seen solid quantitative performance from this company, which in its most recent quarter reported that revenue had risen by 25.2%.
It also just won a $106.7 million lawsuit against GlaxoSmithKline for intellectual property rights regarding the latter’s generic version of Mylan’s antidepressant drug Paxil.
- Vertex Pharmaceuticals (VRTX): Vertex has a market capitalization of $18.34 billion. Importantly, the company is currently losing $1.98 per share annually.
Many investors and shareholders are fearful, as they point at the clinical trials for a notion of success. Often companies with orphan drugs such as this one (with its Hep-C drug Incivek), end up in a very rough situation. Shares are currently at $70.
- BioMarin Pharmaceutical (BMRN): BioMarin has a market capitalization of $11.45 billion. BioMarin is currently losing an estimated $1.28 per share on an annual basis.
In its recent earnings report BioMarin reported that its total revenue had increased 11.4% to $146.9 million. The company’s product portfolio comprises five approved products and multiple clinical and pre-clinical product candidates. Shares ended yesterday lower at just under $70.
Bottom line, if you’re like Maura and have biotech exposure, I suggest that you consider holding on because this bet could pay off handsomely in the intermediate to longer term.
However, in the shorter term, I don’t see this segment as a "Buy," because I think there’s more downside in store before we see a bounce.
In that case, IBB — along with some of these component stocks — will no doubt move from my "hate to love" list back to my "love to love" it list.
After all, it’s better to buy stocks when they’re rising, not falling!
That’s my take on it.