Biotech ETF Price Swings May Signal Need For Caution


Biotech ETFs seesawed in recent weeks, sliding after grim Fed comments, perking up after blockbuster earnings from big-cap leadersGilead ( GILD ) andBiogen ( BIIB ), and slumping again upon more modest news fromCelgene ( CELG ) andAlexion ( ALXN ).

The gyrations underscored the need for investor caution about this volatile health subsector, experts told IBD.

"We could see large distortions based on earnings season," said Spencer Bogart, an analyst with "There were a few complete breakaway earnings that shocked markets and drove up biotech stocks."

On July 23, Gilead and Biogen announced earnings that handily beat Street estimates. Later that day, positive news rolled in about an experimental cancer drug. Its manufacturer, the loss-makingPuma Biotechnology ( PBYI ), zoomed 295% on massive volume.

Biotech ETFs popped on these reports.

SPDR S&P Biotech (XBI) gapped up 7% to close at 150.27. Ninety percent of the equal-weighted fund's holdings are micro-, small- and midcap stocks, including PBYI.

"Some of the gains in individual biotech stocks were so great that even as a small position in a diversified portfolio, they had an outsized influence in driving those portfolios up," Bogart said.

XBI's performance on July 23 marked a sharp recovery from the prior week. It had tumbled on July 15 after Federal Reserve Chairwoman Janet Yellen described small-cap and biotech stocks as overstretched.

Wobbly Biotechs

Also falling were sector leader iSharesNasdaq Biotechnology (IBB) and the year's best performer among nonleveraged funds in the space,First Trust AMEX Biotechnology (FBT).

Two days later, on July 17, all three ETFs fell below their 50-day moving average lines . Upbeat news from Gilead and Biogen on July 23 pumped them up again.

But the boost proved short-lived, with the funds swooning amid Celgene and Alexion's muted earnings news the next day.

IBB is up 1.5% in the past week while gaining 12.06% year to date. FBT gained 0.9% and 17.82% in the same periods. By comparison, the SPDR S&P 500 (SPY) returned 0.01% and 8.04% over these time frames.

Biotech ETFs have been consolidating since the spring and have formed cup-with-handle bases.

Many analysts share Yellen's views on biotech stocks.

Industry Comparisons

The subsector carries ripe valuations vs. the broader health care sector and U.S. stock market . IBB trades at 26.9 times forward earnings and 6.6 times book value, while yielding 0.27%, according to Morningstar.

In contrast,Health Care Select Sector SPDR (XLV) trades at 20.4 times prospective earnings and 3.4 times book value, yielding 1.6%. SPY carries a P-E ratio of 17.4, P-B of 2.4 and a dividend yield of 2.3%.

Strategists caution that a few recent successes such as PBYI have sparked a speculative hunt for the next hot drug.

"The biotech industry has valuations which far exceed what profits these companies are likely to generate in the future," said Andrew Rosenberger, senior investment manager at Pennsylvania-based Brinker Capital, which manages $17 billion in assets.

The drug pipelines of smaller, more speculative biotech firms are unpredictable, he added.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: GILD , BIIB , CELG , ALXN , PBYI

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