The big pharmaceutical companies get much of the credit for the swell of revolutionary innovations and treatments in the healthcare sector. But those innovations aren’t limited to the big boys. Biotech stocks have been red-hot this year, and a major reason for it is the glut of promising treatments being developed for diseases that have long been woefully undertreated. Many of the companies discovering and testing those groundbreaking treatments are small, clinical-stage biotechs with no revenues and very little coverage on Wall Street. At least until recently.
Lately, investors have been piling in to biotech stocks in droves. Nearly every exchange-traded fund (ETF) that tracks the biotech sector is up more than 20% year-to-date. Here are a few examples:
- iShares Nasdaq Biotechnology (IBB): +21%
- BioShares Biotechnology Clinical Trials (BBC): +30%
- SPDR S&P Biotech ETF (XBI): +30.6%
- ProShares Ultra Nasdaq Biotechnology (BIB): +43.4%
Not bad, when you consider that the S&P 500 is up just 2.5% in 2015. Biotech stocks are known for high rewards, but those rewards typically come during times when the broad market is flourishing. Right now, biotechs are prospering at a time when most stocks are stuck in the mud.
It seems the rise of new treatments is one of the few things that has investors licking their chops these days. And with good reason. Groundbreaking treatments are sprouting up everywhere, and many of them are on the brink of being approved for commercial use. Savvy growth investors—particularly small-cap investors—know that the best time to invest in biotech stocks is before their products or technologies become mainstream. Biotechs that are showing promising results in early clinical trials but remain in the later clinical stages make for ideal investments.
Though not a small cap, Biogen (BIIB) is one example, recently gaining approval for a new Alzheimer’s drug. A number of smaller companies are developing cancer treatments, and many of them have gained the coveted “Breakthrough Therapy” designation from the Food and Drug Administration. Heart failure, diabetes, HIV and glaucoma are among the other diseases with new treatments entering or close to entering the marketplace thanks to advances in modern medicine.
It’s all very exciting, with potential worldwide client bases measuring in the hundreds of millions. The sheer numbers have captivated Wall Street, and the steady stream of media coverage of those new treatments has held investors’ attention. The question is: How long will it last? How much longer can biotech stocks thrive, especially while the rest of the market plods along aimlessly?
Ultimately, it will depend on which way the market goes once investors finally make up their minds. Biotech stocks can thrive in a bull market and even a sideways one; they simply cannot survive in a down market.
A breakout one way or another is coming. If stocks start to decline, you’ll surely want to get out of biotechs immediately—regardless of how many of these in-development drugs get approved. But, if the market breaks to the upside, as it has been doing repeatedly for four straight years now (the S&P hasn’t had a correction of 10% or more since July 2011), expect biotech stocks to get a second wind.
New, revolutionary treatments have surely played a major role in this year’s rush to biotechs. In fact, our Cabot Small-Cap Confidential advisory has almost exclusively recommended biotech stocks of late, and chief analyst Tom Garrity thinks several of them have a chance to double or triple in value if their products get approved for commercial distribution.
To learn more about Tom’s biotech recommendations, click here.
