US Biotech - an opportunity in a Pandemic
For this month’s comments, I wanted to turn your attention to an actionable investment idea: US biotechnology companies. If we’re going to talk about COVID-19 anyway, let’s find a silver lining in the discussion. Pictured below are performance numbers of companies actively engaged in the development and distribution of a vaccine for COVID-19. The top three companies are Moderna (purple), Regeneron (orange), and Gilead (blue). The final two lines act as a reference points and include the Nasdaq biotech sector ETF (green) and the S&P 500 (pink).
Here are my thoughts:
- US biotech companies have outperformed the S&P 500 on a relative and absolute basis.
- Initial speculation for a vaccine has rocketed Modera’s (MRNA) share price. Moderna’s mRNA vaccine is currently being used in a NIH-funded trial in Washington state.[1]
- Regeneron is involved in a clinical trial with an anti-arthritic drug Kevzara to treat COVID-19.[1]
- Gilead’s remdesivir is also being used in clinical trials to alleviate symptoms of COVID-19.[2]
- No one knows which biotech company will come out on top, so an investment in IBB (iShares Nasdaq Biotechnology ETF) will provide a broad-based option to the overall industry and the possible engineer of the vaccine.
- While the performance of IBB is notably negative, it has outperformed the S&P 500, and it provides us with a reasonable entry point into the space. We will discuss the idea in further detail below.
[3] https://www.gilead.com/purpose/advancing-global-health/covid-19/remdesivir-clinical-trials
IBB (iShares Nasdaq Biotechnology ETF)
Firstly, we gain exposure to the three front-runners in the COVID-19 vaccine race. As you can see below, they are listed in the top 25 holdings.
The technical picture of IBB is quite compelling: relative strength, momentum, and price performance are improving. We would be further convinced if volume also confimed price movement to the upside. I suspect this will surface shortly given the “green-lights” below.
As we turn our attention to a longer-term (10 year weekly chart), we can see further evidence of green shoots. 52 week rate-of-change has turned positive, the 14 week relative strength indicator is now above 50, and price looks to be breaking out from a five year consolidation pattern. While this is not definitive, it does add to the weight of the evidence.
We would be remiss if we did not include some fundamental data in our analysis. Here is a summary of the US biotechnology industry and my thoughts:
- On a trailing 12-month basis this industry is hardly cheap relative to the market. The characteristics box clearly indicates that we have paid substantially for this industry’s growth and innovation.
- Sales and earnings are projected to decline in 2020, but are set to rebound in 2021, 2022.
- Most broker recommendations are either buy or overweight, so there should be some institutional support behind the names in IBB.
A final point for review is the fund flows report pictured below. In the last three months, new unit creation is finally positive as depicted in the AUM green line. Given the race for a vaccine and therapeutics to treat COVID-19, we would not be surprised to see further fund flows into this industry. An increase in activity here would cofirm the volume needed for a substantial break-out in IBBs price.
A word of caution is always warranted. Biotechs are high-octane stocks that can move swiftly in one direction and another. Here are Raymond James Ltd., we classify them as high-risk securities. With that being stated, the IBB may be suitable for some investors with higher risk tolerances and longer time frames. Keep in mind that IBB is listed on US exchanges, and thereby, must be purchase with US dollars.
Regards,
Patrick
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