Last week, Federal Reserve Chief Janet Yellen dealt a blow to the biotechnology sector when, in a rare move for any Fed chair, she said valuations for smaller biotech firms “appear substantially stretched.”
While arguably inappropriate for any Fed lead to specifically isolate sectors, Yellen’s commentary sent biotech stocks and exchange traded funds tumbling. The iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB), the largest biotech ETF by assets, is off 3.3% over the past five trading sessions.
Yelllen’s biotech bashing was particularly bad for the SPDR S&P Biotech ETF (NYSEArca: XBI), which as an equal-weight fund, features a healthy allocation to small- and mid-cap biotechs. XBI is off almost 6.6% over the past week. [Dealing With Health Care Valuations…Again]
Biotech ETFs, IBB in particular, will get a chance to have their say in the matter this week amid an earnings deluge. Starting Tuesday, 14 members of the Nasdaq Biotechnology Index, IBB’s underlying index, deliver earnings updates. Over 40% of the Nasdaq Biotechnology Index’s weight steps into the earnings confessional this week, according to data from NASDAQ OMX Global Indexes.
On Wednesday, three of IBB’s top-10 holdings – Gilead Sciences (NasdaqGS: GILD), Biogen Idec (NasdaqGS: BIIB) and Illumina (NasdaqGS: ILMN) – deliver earnings updates. Those stocks combine for almost 20% of IBB’s weight.
Two more IBB top-10 holdings step into the earnings confessional on Thursday, including Celgene (NasdaqGS: CELG), the ETF’s largest holding. The other is Alexion Pharmaceuticals (NasdaqGS: ALXN). Celgene and Alexion combine for almost 15.2% of IBB’s weight.
IBB trades with a P/E ratio of 42.5 and a price-to-book ratio of 10.2, which makes the ETF appear richly valued relative to broader health care ETFs. For example, those numbers on the iShares U.S. Healthcare ETF (NYSEArca: IYH) are 28.2 and 5.6, according to iShares data.
Some market observers have been quick to rebuff Yellen’s assertion that biotech valuations are stretched. ISI Group analyst Mark Schoenebaum said in an open letter to Yellen following her testimony that data going back to 1993 for the biotech sector “show that the current ratio is roughly in-line with the historical median and is approximately 80% below the peak.”
Earlier this year, rampant concerns about biotech valuations sent IBB down 21.1% from its February peak to its April nadir, pushing it and other biotech ETFs into bear markets along the way. However, IBB has surged 16.3% since its April trough, a rally that few have chosen to acknowledge. [Biotech ETFs Rally and no one Cares]
iShares Nasdaq Biotechnology ETF