A Rare Opportunity With A Biotechnology ETF

A frequent criticism of biotechnology stocks is that they usually trade at rich multiples, making the industry appear expensive not only to the rest of the healthcare sector, but the broader market as well. That was true when biotechnology stocks and exchange traded funds were making new highs through the middle of 2015.

Applying that logic would imply that after significant losses that saw some marquee biotech enter or flirt with bear markets, these funds and their holdings could be inexpensive relative to historical norms. Data indicate that biotech stocks are in fact inexpensive relative to their illustrious history as one of most expensive corners of the equity market.

Investors that see a valuation opportunity with large-cap biotechs and are willing to bet on that thesis can consider the Market Vectors Biotech ETF BBH.

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“The sell-off in biotech stocks that began last summer has resulted in valuations that are on par with and in some cases lower than those seen in the broad equity market (at this writing, 2/17/16). Biotech valuations have not dipped this low since the aftermath of the 2007-2008 financial crisis. For investors with an appetite for biotech, this may provide a bargain-priced opportunity,” according to a Market Vectors note published in late February.

Holdings

The $506.7 million BBH holds 26 stocks, four of which are the biotech big four: Gilead Sciences, Inc. GILD, Amgen, Inc. AMGN, Celgene Corporation CELG and Biogen Inc BIIB. Those stocks combine for over 44 percent of BBH's weight.

BBH is down 21.7 percent year-to-date, resides 18.8 percent below its 200-day moving average and 31.5 percent below its 52-week high set in July last year. None of those points sound good, but they could be confirming the opportunity set with BBH.

“Since 2005 U.S. biotech stocks have traded at higher earnings multiples than the broader S&P 500 Index. Over the last 10 years biotech stocks have had an average price-earnings (P/E) ratio of 23.3 versus 16.2 for the S&P 500 Index. Today those metrics are nearly equivalent in the 16 P/E range,” adds Market Vectors.

There are always potential catalysts looming for biotech stocks and ETFs, namely drug approvals and trials and mergers and acquisitions. This year could bring more of at least one of those two themes.

“The expected total number of upcoming clinical trials, new drug applications, and new biologics up for approval is 32% higher now than five years ago,” said Market Vectors.