Like all industries, the biotech industry gyrates back and forth from growth cycles to contraction cycles. Cycles can be influenced by numerous circumstances, including but not limited to, the economy, breakthroughs or failures, asset allocation, the strength and weakness of other industries, and the Food and Drug Administration FDA. During periods of lower economic activity like 2022, biotech stocks may suffer as funding becomes scarcer. The economic impact becomes evident when you consult a two-year chart of the
SPDR S&P Biotech ETF
XBI
:
Image Source: Zacks Investment Research
XBI is lower by 45% over the past two years, while the
S&P 500 ETF
SPY
is higher by 8.3% over the same period:
Image Source: Zacks Investment Research
One may look at the poor performance recently and conclude that investing money in the biotech space at this juncture is akin to throwing good money after bad. However, if you look closely enough, some subtle changes are developing in the biotech sector. Below are five reasons biotech may have a blockbuster 2023:
1.
Relative Strength:
Though relativity in the stock market is a powerful indicator of the future, many investors overlook it. Often, when one sector leads the market on the way down, it tends to lead the market on the path up. XBI topped in February of 2021, while SPY topped nearly a year later in January 2022. Conversely, XBI made a low in June, while SPY registered its recent low in October, five months later.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Time frame is another critical factor to consider when determining the near-term relative strength of an industry group. In December, SPY is -4.9%, the
Nasdaq 100 ETF
QQQ
is -6.6%, and XBI is slightly lower by 1.3%.
Not only is XBI flashing relative strength, but the
iShares Biotech ETF
IBB
is also flashing bullish price confirmation. While the Nasdaq Composite threatens to make new lows, the IBB, which seeks to track the Nasdaq Biotech Index retook its 50-moving average. Furthermore, the 50-day moving average crossed over the 200-day moving average to form a bullish “golden cross”. As of Thursday, the ETF was green on the week, bucking the overall market weakness in a big way.
Image Source: Zacks Investment Research
2.
FDA Approvals are on the Rise:
Generally speaking, basic logic tells us that the more drugs approved by the FDA, the more money the biotech industry will rake in. For whatever reason, in recent years, the number of drugs approved by the FDA has been on the rise, according to data from Statista. For example, from 2017 to 2021, the lowest number of drugs approved was 46, and the most was 59. On the contrary, from 2012 to 2017, the lowest number of drugs approved in a year was just 22, while the highest was 45. If the trend continues, it will be a bullish development for the biotech sector.
3.
Large-Cap Leadership:
Over the past few months, large capitalization biotech stocks have done a complete 180.
Gilead Sciences
GILD
was stuck in a frustrating range for years but is now up nearly 40% over the past six months. Meanwhile, mega-cap group peer
Merck & Co
MRK
has gained an impressive 22.5% over the same period.
Image Source: Zacks Investment Research
Pictured: Large cap biotech favorites like GILD (green) and MRK (red) have outperformed the S&P 500 Index handily.
Meanwhile,
Moderna Inc
MRNA
,
a beneficiary of the Covid-19 pandemic, is regaining momentum. The stock is up over 50% in just six months and has a catalyst in the form of a potential FDA drug approval set for early 2023.
Image Source: Zacks Investment Research
4.
Valuations are more Attractive:
Though biotech stocks have marched higher over the past few months, the steep decline over the past few years and the subsequent rebound in earnings has made the industry-wide valuations much more attractive. Gilead has a P/E of 12.57 for the forward twelve months, undercutting the 17.28 of the S&P 500 Index.
Image Source: Zacks Investment Research
5.
EPS Estimates:
The Zack’s Medical – Biomedical and Genetics is a top 25% group based on consensus estimates provided by Zacks. Zack’s studies show that top-ranked industry groups tend to outperform the overall market drastically.
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