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 up 29% and 49%, respectively, year-to-date. Some market observers believe already hot biotech stocks can continue surging.
“Erin Gibbs, a portfolio manager with S&P Global, points out that ‘the average stock in the XBI is trading at 21 percent below its [average]analyst target price. The average stock is rated a buy,’” reports CNBC.
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.
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.
“Of course, valuations are low for a reason. Gibbs also pointed out that ‘biotech is expected to have earnings contract -3.3 percent in 2017 and then recover to 6.6 percent [earnings per share]growth in 2018,’” according to CNBC.
Related: A Good Time to Own Biotech ETFs
Investors 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. The White House is also looking to help the Food and Drug Administration (FDA) expedite new drug approvals, which could serve as a major catalyst for the biotechnology space.
In the third quarter, investors added $175.2 million to XBI and $139.5 million to IBB. To start the fourth quarter, the two ETFs have added about $164 million in new assets on a combined basis.
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.
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.