How to Play Biotech Stocks After Record Breakout

Biotech stocks just had one of their best weeks ever.

The iShares Nasdaq Biotechnology ETF (IBB) was up 9.5%, one of its biggest weekly gains ever. Why the sudden move? Part of it may be that stiff drug-pricing controls no longer seem imminent, and Congress’ push to repeal Obamacare is further reassuring the big-pharma industry.

The other reason appears purely technical: IBB broke above long-term resistance of 300 last Tuesday. It promptly jumped another 5.6% in the ensuing two trading days.

As IBB shows, biotech stocks had a major breakout last week.Some biotech stocks made a bigger move than others. Here are the five biotechs that posted the biggest gains last week:

Exelixis (EXEL): +26.3%

Incyte Corp. (INCY): +15.5%

Kite Pharmaceuticals (KITE): 14.5%

Regeneron Pharmaceuticals (REGN): +12.6%

Alnylam Pharmaceuticals (ALNY): +12.1%

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Don’t expect these biotechs to replicate that kind of performance this week. But after months of trading mostly sideways—the IBB had been stuck in a range between 284 and 302 since early February—this breakout is a sign that biotech stocks are here to stay after a difficult (and politically uncertain) 2016. In fact, with a 20% gain year to date, biotechs have already outpaced any annual gain for the sector since 2014.

And biotech stocks could still have plenty of room to run. For one, last week’s break above five-month resistance could portend a longer-term rally. Also, for all its recent gains, the IBB still trades 20% below its all-time highs around 400 set two summer ago. On a price-to-earnings basis, many biotechs are still cheap. Look at the forward P/E ratios among the four largest companies in the sector by market cap:

Amgen (AMGN): 13.6

Celgene (CELG): 15.2

Gilead Sciences (GILD): 9.4

Biogen (BIIB): 12.4

For a sector that’s known for high valuations, those stocks look like bargains—at least on the surface. But there’s a caveat: not all of biotech’s big boys are expecting a ton of growth in the next year. Gilead, in fact, anticipates big declines in EPS both this year and next.

Among them, CELG looks like the most solid long-term stock. Analysts expect the company to grow EPS by more than 22% this year, far outpacing its forward price-to-earnings ratio (15.2). And with a share price (133) that broke well above its 50-day moving average (121) during last week’s biotech breakout, CELG appears to have the most staying power from a fundamental and technical standpoint.

And if you’re a trader searching purely for momentum stocks, biotech is a good place to find them. At a time when sector rotation is in full swing in the market, no sector has more good-looking short-term charts than biotech right now.

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