The biotech sector is one of the only “value” plays in the market right now.
It’s crazy, I know. Biotech stocks are super volatile. They’re normally seen as high risk/high reward. It’s certainly not a sector that most folks should consider buying with their “safe” money.
But hey, it’s 2021. This is the year of crazy…
Investors have been throwing money into Special Purpose Acquisition Companies (SPAC), Non-Fungible Tokens (NFT), cryptocurrencies with no function, low-quality bonds that offer little return, and regular stocks that are trading at historically ridiculous valuations.
And, for some reason, they’ve been selling off the biotech stocks.
The S&P 500 is up about 11% so far in 2021. The S&P Biotech ETF (XBI) is down 11%. This lagging performance has pushed the biotech sector down to the lowest value – relative to the S&P 500 – we’ve seen in over a year.
Take a look at this ratio chart comparing XBI to the S&P 500…
When this chart is moving higher, biotech stocks are outperforming the broad stock market. When the chart is falling – XBI is lagging the market.
The biotech sector peaked in early February. And, it’s basically been a straight shot lower since then.
We’re at the point now, though, that the high-flying biotech stocks are looking like value stocks.
Consider United Therapeutics (UTHR), for example. UTHR is a $9 billion company. It’s a top-five holding in XBI. And, after pulling back about 10% over the past month, UTHR trades for about 14 times this year’s earnings estimates.
That’s quite a bargain compared to the 23 times forward earnings investors are willing to pay for the S&P 500.
Now, I’m not suggesting that folks just blindly throw money into the biotech sector because it’s cheap relative to the broad stock market. But, I am saying that if you’re looking for value in a market environment that’s squeezed just about every drop of value out of it, then maybe you have to look outside of the ordinary.
After all, we found value in the gold sector about a month ago. That seems to be working out pretty well so far.
So, maybe it’s time to start looking for value in the biotech sector.
Best regards and good trading,
Editor, Market Minute