Biotechnology stocks and ETFs are slumping in the fourth quarter. For example, the iShares Nasdaq Biotechnology ETF (NASDAQGM: IBB), the largest biotech ETF by assets, and its equal-weight rival, the SPDR S&P Biotech ETF (NYSEArca: XBI) are saddled with fourth-quarter losses of 5.8% and 1.6%, respectively.
However, the slump in once hot biotechnology ETFs could present investors with a buying opportunity. Healthcare stocks are also showing attractive valuations relative to other defensive sectors, which are richly valued. Biotechnology historically trades at multiples that are elevated relative to broader benchmarks, but after last year’s of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.
The Trump Administration’s tax reform effort is seen as a catalyst for the healthcare sector, including some big-name biotechnology companies.
“As Republicans move closer to passing the Senate’s tax bill, investors in biotech will remain focused on the possibility of a lower tax rate for repatriation of funds,” reports Bloomberg. “The prospect of large companies, including Amgen Inc. and Gilead Sciences Inc., bringing cash back to the U.S. may spur some highly anticipated deals in a space that has been tracking this year to the lowest volume of transactions since 2013, according to data compiled by Bloomberg.”
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. Amgen, Gilead and the other large biotechnology companies are major parts of IBB’s lineup while XBI leans toward smaller firms.
“The market will be favorable for biotech companies, at least in the short-term, with tax repatriation a tailwind that could stimulate a more positive view for both large and small companies, Jefferies analyst Michael Yee wrote in a note. Gilead and Amgen both hold more than $20 billion outside of the U.S., so the ability to employ that capital in a domestic setting via mergers and acquisitions, dividends and repurchases is a ‘win-win for large and small biotech,’” according to Bloomberg.
ETF traders who are betting big on the biotechnology sector rebound have also utilized leveraged long options including the Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU), which takes the 3x or 300% daily performance of the S&P Biotechnology Select Industry Index.
For more information on the biotech sector, visit our biotechnology category.