Biotechnology stocks and exchange traded funds are in the midst of one of their longest declines in recent memory, providing investors with ample reasons to avoid these assets.
On the other hand, some analysts are becoming more constructive on biotech stocks. That’s a positive, and every rebound has to start somewhere, but investors have no way of knowing exactly when a biotech resurgence could materialize in earnest.
One way of contending with that situation is to consider ETFs that have decent biotech exposure, but aren’t solely focused on that industry. In that group, the Invesco NASDAQ Next Gen 100 ETF (QQQJ) is an idea to evaluate.
QQQJ, which tracks the NASDAQ Next Generation 100 Index, allocates nearly 20% of its weight to healthcare stocks, its second-largest sector exposure behind technology. The bulk of QQQJ’s 20 healthcare holdings are biotech names, indicating that QQQJ offers investors a solid avenue for accessing potential value in the battered biotech space.
“A third of that universe is trading below cash on balance sheet, so you’re looking at companies in negative enterprise value position. That seems like a very attractive entry point, if you buy into the long-term growth story,” said Luke Barrs, head of fundamental equity, EMEA at Goldman Sachs Asset Management, in an interview with CNBC.
Another reason QQQJ could be a credible idea for long-term investors wagering on a biotech rebound is the point that it’s not a large-cap-heavy fund. The average market capitalization of QQQJ’s 100 components is $19.64 billion, according to Invesco data.
Specific to biotech, QQQJ’s average market capitalization is relevant because it implies that the ETF could benefit when industry consolidation resumes because some of its holdings could be credible takeover targets. In fact, some have already received speculation to that effect.
“If you think about the exit strategy for some of these businesses, clearly the opportunity for M&A in this space — where large pharma companies could step in and acquire some of these unique and new technologies — is very attractive,” Goldman’s Barrs told CNBC.
BioMarin Pharmaceutical (NASDAQ:BMRN) is among the mid-cap biotech stocks that some analysts recently highlighted as value ideas, and that’s one of QQQJ’s healthcare holdings. Horizon Therapeutics (NASDAQ:HZNP) and Incyte Corp (NASDAQ:INCY) — two other QQQJ member firms — are among the mid-cap biotech names that have recently been mentioned as potential takeover targets.
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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.
