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After the big fall, the time has come to bet on a rebound in biotech stocks

author:Barron

Compared with individual stocks, ETFs are more suitable for individual investors.

In the first year of the COVID-19 outbreak, a large number of investors poured into biotech stocks.

Stock prices of star companies that produce vaccines, such as BioNTech (BNTX) and Moderna (MRNA), have multiplied several times, and the boom has also pushed up the prices of stocks across the sector. From early 2020 to early February 2021, exchange-traded fund SPDR S&P Biotech (XBI), which tracks 157 biotech stocks, surged more than 80 percent. But after peaking on Feb. 8, 2021, SPDR S&P Biotech has fallen sharply by 47.8%.

Although the sell-off is very large, it should have happened long ago. Over the past three years, the open market has been flooded with a large number of high-risk biotech companies in the early stages, and investors who are quickly flocking to these companies but do not know much about them have quickly realized the risks of investing in biotech stocks. Later, as the prospects for economic recovery began to clear, investors withdrew from the biotechnology sector, resulting in a sharp decline in the valuation of related stocks.

After the big fall, the time has come to bet on a rebound in biotech stocks

It's time for investors to rethink the biotech sector.

In the long run, the outlook for biotech companies remains very good. The need to treat common but deadly diseases such as Alzheimer's is imminent, and companies that can overcome these diseases often generate huge revenues. At the same time, biology is evolving rapidly, as demonstrated by Moderna and BioNTech's successful development of entirely new vaccines in the months following the outbreak, smaller, specialized biotech companies are often better equipped to turn new science into new drugs than pharmaceutical giants.

In addition, the valuations of small and medium-sized biotech companies are currently very low. Barron's analysis of FactSet's data found that 16 percent of the stocks included in SPDR S&P Biotech were priced at only 2 times or less of their cash and short-term investment value, and 36 percent were priced at only 3 times or less of their cash and short-term investment value.

Cowen analyst Yaron Werber said: "Historically, we used to say that 2 times is the bottom, and now I would even say that 1 times is the bottom. ”

Top five positions in two leading biotech ETFs

SPDR S&P Biotech ETF (XBI)

After the big fall, the time has come to bet on a rebound in biotech stocks

iShares Biotechnology ETF (IBB)

After the big fall, the time has come to bet on a rebound in biotech stocks

Note: Data as of March 25, 2022

Source: State Street Bank; BlackRock; Bloomberg

The low valuation means that the opportunity to buy small and medium-sized biotech stocks has come. However, given the complexity of biotechnology and the risks inherent in the industry, the best option for individual investors is not individual stocks.

Biotech professionals often buy a basket of stocks in the sector in the hope that a few stocks will perform well. But the best fit for individual investors is the inclusion of ETFs by SPDR S&P Biotech and others that incorporate a range of small and medium-sized biotech companies, in this way to bet widely on the long-term prospects of biotechnology.

Jared Holz, healthcare equity strategist at Oppenheimer, said: "Biotech companies will still thrive in the long run, but investors now have to look at a large number of companies that have been established in the last 5 to 10 years. ”

A report released by Evercore ISI analysts in February showed that the number of listed biotech companies has roughly doubled since 2015. During the pandemic, the number of biotech IPOs soared from 50 in 2019 to 107 in 2021, and these companies chose to go public in the early stages of technology development and riskier stages.

These IPOs were once well suited for public market investors, and Cowen analyst Phil Nadeau said: "It comes down to the fact that interest rates are very low and investors are willing to go up the risk curve." ”

This phenomenon peaked in early 2021. Cowen's Verbey said: "A year ago a lot of investors flocked to buy companies that they didn't really understand because valuations were soaring so fast that they ignored companies with more attractive valuations, more solid fundamentals, less downside and upside. ”

The share price reversal wasn't caused by a single factor, but the series of controversies sparked by the U.S. Food and Drug Administration (FDA) after it approved BIOBs for Alzheimer's drug last June is clearly one of the reasons for the pullback in biotech stocks.

Jefferies analyst Michael Yee said that after that, "biotech stocks have been falling, and investors have begun to be full of concerns about regulatory issues and reimbursement processes." ”

These concerns will take some time to quell before the valuations of biotech companies rise again, and the global economic environment will take some time to improve. Verbe believes it's not this year, he said: "Investors can invest money now and set the investment period to two years." ”

For individual investors, should they invest their money in the small and mid-cap stocks of the biotechnology sector or in the mid-cap stocks? Holtz recommends mid-sized biotech stocks with clear business models. Verbe believes it's time to "pick stocks from the bottom" in small and mid-cap stocks whose valuations are down more than in large-cap stocks.

Investors can consider the above-mentioned SPDR S&P Biotech, an ETF that tracks a revised equal-weighted index that includes stocks from more than 150 companies. This ETF provides investors with exposure to a range of stocks, including small and mid-cap stocks.

iShares Biotechnology is another leading ETF, and the industry's best-known companies have a larger weight in this ETF. The five stocks with the largest weights are all S&P 500 constituents, accounting for more than a third of the value of their portfolios, and small-cap stocks make up only a small fraction.

Biotech stocks are currently very low valuations, and now is an attractive time to buy for investors willing to bet on the sector for the long term.

Josh Nathan-Kazis, | writer for Barron's

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Original barronschina articles, not reproduced without permission. For the English version, see the March 31, 2022 report "Biotech Stocks Have Taken a Beating. Here’s How to Play a Rebound.”。

(This article is for your informational purposes only and does not constitute the provision or reliance of investment, accounting, legal or tax advice.) )

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