Despite suffering significant losses recently, biotechnology stocks and ETFs have seen some impressive gains over the last year or so, as coronavirus vaccines have propelled companies like Pfizer and Moderna to new heights. However, some analysts believe that the sector could have even more upside in store.
While the iShares Biotechnology ETF (IBB) fell somewhat Friday amid an overall down stock market, after getting a break during Thursday’s trading session, Miller Tabak’s Matt Maley told CNBC’s “Trading Nation” on Thursday that the fund could see more gains in the future, once the weak hands are flushed out.
“When you see big downdrafts like we’ve just seen, that’s an opportunity where you can add to those positions,” the firm’s chief market strategist said.
The IBB’s relative strength index (RSI), an important technical indicator that gauges momentum, recently achieved its most oversold level since 2018, which is a rare event in recent years, and something that often heralds a coming bounce, according to Maley.
“Each time, that’s resulted in a huge bounce in the group, anywhere from 18%-40%,” Maley said. “I think this is a great entry point. Even if you’re just a short-term trader, this is something that should allow you to get a nice rally into the end of the year.”
A related momentum pattern is occurring in shares of Moderna, a key constituent of the fund, which has lost almost 30% in value over the last two weeks amid competition from companies like Merck, which released antiviral COVID pill news, as well as a more widespread sell-off in growth stocks, Maley said.
“Its RSI chart is down to a level that it’s only been down three other times in the last year. All three of those times, the thing has rallied anywhere from 28%-60% over the next several months,” continued Maley. “I think this is a great entry point for long-term investors and even short-term ones who like to be a little bit more on the active trading side of things.”
The recent declines for the ETF are atypical, as not only has the IBB beaten S&P 500 performance since its inception in 2001, growing over 361% versus the S&P’s approximately 226% gain, but the upward trend could continue, according to BK Asset Management’s Boris Schlossberg, who had comments in the same interview.
“Life sciences just generally as a sector is going to be one of the key sectors of the 21st century,” said Schlossberg, who is managing director of FX strategy at his firm.
“This is one of those types of sectors that you simply cannot ignore. It’s going to be a core holding for any investor,” he said. “Whatever sell-offs we have, whatever dips we have in this sector are very much temporary. You’ve got to just buy the dip here all the way through.”
Savvy investors or traders who are looking for a way to trade the ETF could use options and look to sell puts at the $140 level, said Schlossberg.
“The very promise of mRNA technology suggests that we could have some massive breakthroughs in life sciences going forward and that’s going to make this whole sector, I think, one of the hottest sectors that we’re going to see,” Schlossberg said. “I think in many ways life science is going to be more important than information technology into the greater half of the 21st century.”
Investors looking to trade biotech stocks using ETFs garnered recent support from other analysts as well.
“Biopharma is still trading at a low multiple (15.5x 2021 P/E, 14.0x 2022 P/E); we think the entire group could benefit from an improving political/regulatory backdrop and a resurgence of M&A in 2H21/2022,” explained Bank of America recently.
Aside from IBB, other ETFs for investors to consider include IBBJ, BIB, ARKG, and PBE.
The Defiance Nasdaq Junior Biotechnology ETF (IBBJ) follows the Nasdaq Junior Biotechnology Index (NBIJR), the small-cap offshoot of the widely tracked Nasdaq Biotechnology Index (NBI). The junior index limits components’ market values to $5 billion when those names are admitted. That cap can bear fruit for investors.
Meanwhile, the ProShares Ultra Nasdaq Biotechnology ETF (BIB) is a leveraged option for investors looking for exposure into biotechnology and pharmaceuticals during bullish times for the industry. The fund captures twice the daily return of the underlying Nasdaq Biotechnology Index, before fees and taxes. The exposure resets daily, and as such does not provide a simple 2x multiplier on the return of the underlying index.
The ARK Genomic Revolution ETF (ARKG) is an actively managed fund from the team at ARKInvest that tries to pick the companies best positioned to profit from advancements in energy, automation, manufacturing, materials, and transportation. ARKG invests in companies that could profit from technological and scientific advancements in gene editing, genetic therapy, molecular diagnostics, and stem cell advances.
Finally, the Invesco Dynamic Biotechnology & Genome ETF (PBE) is part of the suite of Dynamic ETFs from PowerShares, and it uses quant-based screening to identify component companies that may be poised for outperformance relative to a broad-based universe, but is a bit on the expensive side.
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