By Eric Shamilov, analyst, Market Minute
No sector has been hit harder this year than biotech.
In many ways, it has symbolized the bust in the overvalued areas of the market.
The biggest example may have been Cathie Wood’s ARK Innovation ETF (ARKK).
But if you compare ARKK side by side with the SPDR S&P Biotech ETF (XBI), they’ve been moving in lockstep for the last year.
And as the market is trading at its lows – unable to shake off the constant flow of war headlines – a part of the biotech sector is starting to attract buyers.
Let me explain…
Back in December, we recognized that 2022 would be the year of the value trade…
On December 10 I wrote:
Tech may be the biggest disappointment of next year… investors tend to become myopic right before a trend begins to unravel. But there needs to be a pin that pops the balloon, and it usually comes in the form of central bank policy… I think we’re finally heading into a golden age of value.
The iShares S&P 500 Value ETF (IVE) has fallen only 5% this year, while the iShares S&P 500 Growth ETF (IVW) is down 18%. That’s a big difference.
And XBI, as a whole, has performed more like IVW than IVE – falling 28%.
But XBI is not a concentrated portfolio. Meaning, even though all 188 stocks in the portfolio are in the biotech sector, their size, profitability, and valuations vary greatly.
And at the current levels, some of the larger biotech stocks are starting to look very attractive.
Take a look at this chart…
It takes the ten biggest stocks in XBI (which holds 188 total stocks) and compares it to the rest of the portfolio…
Those are stocks like Moderna (MRNA), Regeneron (REGN), and Horizon Therapeutics (HZNP). Those ten stocks are actually up this month, while the biotech sector itself is down 10% and the S&P 500 is down 4.5%.
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From a price/sales (P/S) point of view, these top names have value. The average forward P/S ratio of these top ten is just 6.4. That’s very reasonable for the high-growth biotech sector. Right now, that P/S is at a 10-year low.
It’s also interesting from a market-timing point of view.
Take a look at this chart of XBI with its Relative Strength Index (RSI)…
You can see that prices are diverging from the indicator… which means the probability for a reversal is rising (green arrow).
I prefer to stick with the large-cap names within the sector. In fact, that’s a theme I’ll be playing all year.
And with the big, anticipated FOMC meeting coming up tomorrow, a change in market sentiment might be all this sector needs right now.
Regards,
Eric Shamilov
Analyst, Market Minute
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