With investors searching for sectors that look like legitimate value plays and discovering fewer and fewer options, a surprising group is being deemed a value proposition: Biotechnology stocks and exchange traded funds.
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.
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.
SEE MORE: BBP – An Outperforming Biotechnology ETF
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.
[related_stories]“We believe that you’re going to see consistent revenue growth, as well as improvement within operating margins over the next three to five years,” said Chad Morganlander, portfolio manager with Stifel Nicolaus, in an interview with CNBC.
Biotech ETFs have recently rallied, but that does not mean investors are rushing in. In fact, outflows have hit some big-name biotech ETFs.
For example, the SPDR S&P Biotech ETF (NYSEArca: XBI), one of the largest biotech ETFs, is higher by nearly 17% over the past month. However, some investors are displaying the feeling that the recent rally in biotech ETFs might be short-lived.
“At least that’s the signal sent by whoever yanked $255 million from the SPDR S&P Biotech ETF at the end of last week, the biggest outflow in 16 months, according to data compiled by Bloomberg. The withdrawal came with a gauge of S&P 500 drugmakers sitting close to the highest level of 2016. Its 19 percent gain over the past five weeks outpaced all the benchmark index’s 67 industry groups,” reports Joseph Ciolli for Bloomberg.
Investors who are closely watching the presidential race will want to keep an eye on Democratic nominee Hillary Clinton in the coming months. If Clinton makes her way to the Oval Office and implements more regulation on pharmaceutical drug pricing, biotech companies may underperform the broader market.
Related: Biotech ETFs Reeling in Longest Sector Selloff in Two Decades
IBB “hit an all-time high a little over a year ago. Since then, the group has come down quite a bit, plummeting in the first few weeks of 2016. This bounce the ETF is enjoying since those low levels in January has made several analysts more bullish on the sector,” according to CNBC.
For more information on the biotech sector, visit our biotechnology category.
iShares Nasdaq Biotechnology ETF
