Biotechnology stocks and exchange traded funds, such as the iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB), are not often thought of as value plays. After all, biotechnology stocks historically trade at rich multiples relative to the broader healthcare sector and the overall equity market.
The impact of a Trump presidency on healthcare stocks remains to be seen. Candidate Trump rebuked Obamacare and if successful in that effort, there would likely be some effect on diversified healthcare ETFs due to their exposure to health insurance providers.
Market observers are growing more bullish on the sector as a Republican-led Congress and administration could enact reforms to free cash held overseas for tax reason by large U.S. pharmaceutical companies, which could pave the way for increased acquisitions in the sector.
While the sector has gotten a hair cut, for long-term investors who want to find above average growth opportunity for a discounted price, today is a good day to invest. The Price/Prospective Earnings per Morningstar is lower than the general market yet the long-term earnings and sales growth surpasses the S&P 500 as measured by the popular SPDR S&P 500 ETF (SPY),” according to a Seeking Alpha analysis of biotech valuations.
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.
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. IBB is the largest biotech ETF by assets.
During the presidential campaigns, biotechnology and pharmaceutical companies like EpiPen allergy shot maker Mylan NV and Valeant Pharmaceuticals International have come under fire over their high drug prices, following Hillary Clinton’s censures.
While Trump was expected to be a proponent to free-market health care, drug company executives and observers warned that the new president could scrutinize prices as a populist issue.
“According to Ying Huang, a biotechnology analyst for Bank of America Merrill Lynch, a lowered corporate tax rate from an industry wide 20% to 15% and repatriation of funds will provide growth opportunities,” adds Seeking Alpha.
For more information on the biotech sector, visit our biotechnology category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.