Three Bullish Tailwinds for Biotech
Dear Wall Street Daily Reader,
A few days ago, I responded in a cheeky fashion to the haters about the recent underperformance of small- and micro-cap stocks.
(It’s a must-read. So if you missed out, you can catch up here.)
Today, we’re turning our attention to another investment I’ve been super-bullish on for the last year: biotech.
Just like small- and micro-cap stocks, biotech’s been suffering through a slowdown. But as you’ll see in a moment, there’s no reason to panic (or sell) here, either…
Look Out Below!
In case you didn’t notice, the major biotech indexes have been selling off sharply since early February.
(click image to enlarge)
Furthermore, the smaller the company, the more severe the sell-off has been. Consider:
- The large- and mega-cap biased iShares Nasdaq Biotechnology ETF (IBB) has been down as much as 13%.
- The SPDR S&P Biotech ETF (XBI), which has more exposure to small- and mid-cap biotechs, has been down as much as 24% — nearly double the drawdown for IBB.
- And the smallest biotechs are down roughly double that amount, about 50%.
But don’t fret. Here are three major bullish factors to keep in mind…
Fundamentals, Financings, and Seasons
First, for the majority of biotechs I’ve been recommending, nothing has fundamentally changed for the worse.
If anything, the fundamentals keep getting better. And eventually, the stock prices will reflect this reality.
Or as famed value investor Benjamin Graham noted, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Second, venture capital funding for biotechs, a key leading indicator, remains at record levels.
In fact, U.S.-based biotechs raised a record $12 billion in venture funding in the first quarter, according to Pitchbook.
Even more impressive, that marks the fourth quarter in a row of chart-topping funding.
We couldn’t ask for a more robust and bullish funding environment for innovation in biotech.
Third, we’re about to enter a historically strong performance season for biotechs.
As you can see in the chart below, biotechs have surged pretty much every April/May through July for five years (and counting):
(click image to enlarge)
In other words, the old market adage to “Sell in May and Go Away” should never be applied to biotechs.
Remember, the chart above is for the major biotech index, which represents the average seasonal rally in biotechs for mostly large- and mega-cap companies.
That means, when the seasonal biotech surge hits again, we can expect our small- and micro-cap biotechs to rally way more.
That’s not merely hopeful talk, mind you. I’m betting on it with my own money, too. And in upcoming updates, I’ll share what companies I’m betting the most on.
Performing Over Time
So stay tuned…
And remember what market-beating value manager Robert Olstein says (emphasis mine), “The desire to perform all the time is usually a barrier to performing over time.”
The investments we focus on here are designed to perform over time, not all the time.
In fact, many have already performed — and based on my research, I have full confidence that the others will eventually perform, too.
So, any other (cheeky) questions for me this week?
Ahead of the tape,
Editor and Founder, Trend Trader Daily