It's tough to beat the market when stocks are soaring.
But one sector is doing just this, delivering nearly 2-times
the gains of the broad market in 2013. It's not housing,
financials or even energy, even though all of these sectors are
It's the biotech sector and the business of drug
development. The benchmark
S&P 500 biotech sector ETF (
is up an incredible 36% year to date, handily outperforming the
19% rise for the S&P 500.
That performance puts biotech stocks well ahead of all other
sector this year. While the Health Care (
) and Financials (
) sectors are also rallying, they are trailing biotech by 8% to
Biotech's historic run to the top of the market is even more
impressive considering that it has endured for more than 24
months. The biotech bull-run began in August 2011, and has barely
taken a breather.
Why the big move? The reasons are extremely attractive
valuations and the defensive attributes of health care and
pharmaceutical industry. At the beginning of this year the
biotech sector was still trading at a discount with a forward PE
of only 10-times 2015 estimated earnings.
Another contributing factor is the massive gains for biotech
IPOs. In other words, it's been hard to lose money in this high
growth sector. And that's despite the considerable risks
associated with investing in early-state biotechnology
So has the biotech rally run its course? Are there more gains
ahead? Or is this high-flying sector ripe for a correction?
There is still money to be made in biotech, but my advice is
that investors look past mutual funds and
and instead invest in individual companies. This is how you'll
capture the greatest amount of upside.
Based on 2015 price-to-earnings estimates, biotech now trades
at a 20% premium to the S&P 500. Many investors will take
this to mean the sector is too expensive, but that's a
Many companies are still attractively priced when we factor
into the equation. On a price-to-earnings growth basis, biotech
still trades at a 30% discount to the S&P 500 index. This
simply means that the biotech industry is expected to grow
significantly faster than the S&P 500 in the coming years.
And that earnings growth justifies a higher PE ratio.
The best way to play the biotech sector right now is to buy
select companies "on the dips." This will position investors to
capitalize on the tremendous growth that is likely to come over
the next five years.
Specifically, I like to invest in biotech stocks with
future share price catalysts
One of my favorite ways to do this is by examining product
pipelines. After all, new drugs are what will drive share prices
during the next phase of the biotech rally.
For example, new product introductions have fueled recent
buying in several names.
received favorable Phase III results with its cancer drug
REVLIMID early in July. And in March, the FDA approved
multiple sclerosis drug Tecfidera. Both of these drugs should add
measurable revenues in the years ahead.
One of the great things about the biotech space is that there
are always new product catalysts on the horizon. And generally
speaking, figuring out a company's product pipeline isn't
especially difficult or time consuming.
Most companies detail their product pipeline on their websites
and in investor presentations. These are the starting points for
investing strategy in the biotech space. It's a relatively
straightforward process to build a timeline of events, and then