One of the most reliable ways to find the best opportunities for the next bull market run, is by focusing on the sectors that have the best combination of growth, value, and catalysts. Utilizing this strategy in the previous decade would have led investors to focus on SaaS or Internet stocks.
Many of the top names in these sectors gained more than 1,000% during the previous bull market. Of course, investors will need to find new stocks in new areas to achieve such returns during the next bull market.
Today, I want to talk about the biotech sector, and discuss 3 reasons why every investor needs to pay attention.
#1: Valuation
While so many parts of the market became egregiously overvalued, biotechs are an exception as the entire sector was flat between 2015 and 2022.
BUT, only the stocks were flat. Earnings actually EXPLODED.
The best way to see this is the weighted average P/E for the biotech ETF, IBB which went from 83 in 2015 to 12.5 now.
From a more qualitative perspective, we can see that the IPO market has dried up along with inflows from retail investors and institutions. In fact, nearly 25% of small and mid-cap biotechs have more cash on hand than their actual market caps.
#2: Growth
Usually, investors can only find attractive valuations in boring industries with limited growth prospects.
Biotechs are a rare and notable exception.
Populations in the developing world are aging at a rapid pace. There is the famous stat that Japan sells more adult diapers than baby diapers. Well, this is going to be the reality for the US and Europe in a few decades as well.
An aging population also means that demand for new drugs will also be increasing. There are always new innovations in the space that are leading to better outcomes in terms of diagnosis and treatment.
Healthcare spending also continues to grow at a faster rate than the overall economy.
This is another trend that won’t abate anytime soon given that a large share of this is subsidized by the government. And, there is no political appetite on either side of the aisle to change this arrangement.
#3: Catalysts
An appealing growth and value backdrop will pique any investors’ interest. But learning about the powerful catalysts in play will turn this interest into an obsession.
The most potent is that we are now in an environment of slowing growth. At the start of the year, inflation was the biggest threat to the economic outlook.
This has now been replaced by a recession. The best evidence of this is longer-term rates turning lower along with forward-looking inflation indicators.
This is a brutal environment for most stocks but manna for biotechs. These companies’ bottom and top lines are disconnected from economic or monetary conditions. As the economic outlook erodes, money will flow from cyclicals into sectors that are more insulated from the business cycle.
Another catalyst for the sector are the barren pipelines and flush balance sheets of major pharmaceutical companies.
This puts a bid under the biotech sector as these companies are dependent on the biotech sector for the innovation that will deliver the next generation of blockbuster drugs.
Finally, the most exciting catalyst is this exact innovation. Over the past decade, the cost of drug-development has declined due to computer modeling and better understanding of diseases and the human body. This is leading to better margins and outcomes.
These technologies are also serving as a bridge to a future of personalized medicine. The first step is in improving diagnosis in terms of accuracy and speed. This is where we are today.
The most exciting part of the biotech space is in the micro-cap and small-cap areas as these are the companies with the most potential. As noted above, many are trading at valuations that are below the cash on their books.
Most investors simply don’t have the time or inclination to dedicate serious amounts of time and energy to learn about the nuances of various biotech companies.
That’s why we do the heavy lifting (and thinking) to identify the highest-quality companies in the biotech space.
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SPY shares closed at $395.09 on Friday, down $-3.70 (-0.93%). Year-to-date, SPY has declined -16.20%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
This Sector Will Lead the Next Bull Market… StockNews.com
