Biotech stocks have been quite strong lately although you wouldn’t know it by studying the charts of the group’s biggest names. Heavyweights such as Gilead (GILD) and Celgene (CELG) appear to be in a downtrend or stalled. Gilead is facing a decline in expected earnings while Celegene is facing stiff comparisons after a strong 2015.
On the other hand, smaller unknown names have been gapping up in price and reversing downtrends. Last week alone, many down and out Biotech stocks rallied strongly pushing the Russell 2000 Small Cap Index was up 2.4% - more than double the S&P and Nasdaq.
While tempting to participate, it may be difficult for most investors to embrace these smaller stocks that are on the move. Not only are they illiquid, most of these companies have negative earnings and sales as they are still in the development phase of trying to find treatments for any number of diseases. For those who lack the risk tolerance for this type of stock, the better way to go would be the ETF that has a number of these small cap stocks.
In particular, the iShares Nasdaq Biotechnology ETF (IBB). This index has a total of 185 stocks and while there are larger cap stocks with over 5% weightings, many of the companies are small. As you can see in the chart below, this index has broken above key areas of resistance and is behaving in a positive manner.
The move to Biotech stocks is a bit surprising given the uncertain tone to the broader markets. That said, this “risk-on” attitude shows a confidence that is helping the Nasdaq charge to new highs. While ETF’s tend to show more muted results than some of their dynamic constituents, the lack of sure fundamentals in many Biotech stocks makes this ETF very interesting.
Mary Ellen McGonagle
Editor, The MEM Edge Report