After disappointing in 2021, biotechnology stocks and exchange traded funds are getting shellacked this year as growth stocks fall out of favor due to rising interest rates.
As experienced biotech investors know, the industry frequently trades at premiums relative to the broader market, and extreme discounts are rare. However, that’s the scenario at work today, which could be a sign that opportunities are available with funds such as the Invesco Nasdaq Biotechnology ETF (IBBQ).
IBBQ follows the Nasdaq Biotech Index, the most heralded biotech stock benchmark. While valuation alone isn’t a reason to buy or sell a security, it’s hard to ignore the fact that IBBQ’s underlying index is currently home to a slew of stocks that are downright cheap.
“Nearly 200 such North America-based companies have negative enterprise values, meaning that their liquid assets are worth more than their market values,” reports Cristin Flanagan for Bloomberg.
Specific to the Nasdaq Biotech Index, about 20% of its 370 components currently trade below cash. Biotech valuation conditions don’t come along very often. In fact, the data referenced in the aforementioned Bloomberg article stretch back 20 years, and discounts of this nature haven’t been seen over that time.
The Nasdaq Biotech Index valuation opportunity is particularly pronounced among the benchmark’s smaller components. The 20% of the index trading for less than cash has a combined $20 billion in capital but combined market values of just $11 billion, according to Bloomberg. Cancer drug makers, some of which reside in the IBBQ portfolio, are badly bruised and heavily discounted.
“Oncology companies are trading at a median of 0.7 times enterprise value to cash, compared with a 1.1 times for those pursuing other diseases,” notes Bloomberg.
The average market value of IBBQ’s 370 components is $47.35 billion — a number that’s skewed higher by about 52% of those stocks being classified as large-caps. However, there is more value in the ETF than many investors are expecting. Approximately 39% of IBBQ’s holdings across the large-, mid-, and small-cap spaces are considered value stocks, according to Invesco data. That’s a staggering percentage for a biotech ETF.
Speaking of value, IBBQ charges just 0.19% per year, or $19 on a $10,000 investment, making it one of the more cost-friendly options in the biotech ETF landscape.
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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.