Rare are the occasions that biotechnology stocks and exchange traded funds are seen as offering value. In fact, the sector historically trades at multiples that are elevated relative to broader benchmarks, but in a year of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.
The biotechnology sector has been among this year’s worst performing areas of the market as investors shifted out of high-flying growth stocks in face of increasing market uncertainties for more value plays.
However, a potential catalyst for biotech stocks and ETFs looms as traders that previously heavily shorted some of these names move to take profits and cover these winning bearish bets.
“The Recent P/E Multiple Compression was Exacerbated by the Sector Sell-Off of the Last 12 Months, and Has Been Compounded by the Growing Denominator of Still Strong Forward Consensus Revenue and Earnings Estimates,” according to part of a Leerink note posted by Ben Levisohn of Barron’s. “Much of the near term growth comes from established brands that seem likely to prove very durable to us, with pricing power, growing demand, limited or manageable competitive challenges and new indications, geographies and formulations to sustain revenue and cash flow beyond the implied mean reversion of today’s multiples.”[related_stories]
The Leerink analysts highlighted large-cap biotech names as trading at discounts compared to long-term averages, noting “large cap biotech is -30% off the mean multiple of 20.6X for the period of Jan 2002 – present.”
Investors taking the valuation bet on large-cap biotech could find their way to the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), which tracks the Nasdaq Biotechnology Index. IBB, the largest biotech ETF by assets, is heavily allocated to the largest biotech names. For example, Amgen (NasdaqGS: AMGN), Gilead Sciences (NasdaqGS: GILD) and Celgene (NasdaqGS: CELG) combine for about a quarter of IBB’s weight.
Related: Resisting Biotech ETFs
IBB, which holds nearly 190 stocks and is a cap-weighted ETF, has a price-to-earnings ratio of just over 21 and a price-to-book ratio of 4.92. The ETF’s three-year standard deviation is just over 25 percent.
“We believe the large cap names in the sector are poised for a robust recovery in the second half, even as political fears persist through year end and beyond,” add the Leerink analysts in the note posted by Barron’s.
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iShares Nasdaq Biotechnology ETF