Biotech Poised To Breakout — Bret Jensen

Biotech Poised To Breakout 2 comments

Dec 26, 2015 10:45 AM | about stocks: IBB

“Come what may, all bad fortune is to be conquered by endurance.” — Virgil

• Biotech investors who have remained patient over the past six months are starting to be rewarded. The sector recently had one of its periodic and frequent bear markets that started in late July and lasted to the very end of September. After an initial 10% to 15% rally off the bear market low, the sector has spent two months in a trading range of approximately $300.00 to $340.00 a share as measured by the iShares Nasdaq Biotechnology (NASDAQ:IBB) ETF, the largest ETF focused on the biotech sector with almost $9 billion in assets. We are still a long way from the $400.00 a share level this ETF hit before the recent bear market commenced.

• We are now at the top end of that ~$300 to ~$340 range. I believe we could very well break through that ceiling in coming weeks and 2016 could see a very good start to the year for the biotech sector. I have that view for a couple of reasons. First some of the major large cap names within the sector are delivering good news. This month Amgen (NASDAQ:AMGN) hiked its dividend an impressive 27% and this week Celgene (NASDAQ:CELG) settled a patent dispute on its blockbuster blood cancer drug Revlimid which sent its shares 10% higher. These are just two recent examples of the improving news coming from the large cap part of the sector.
• As we head into 2016, it appears that it will be another year of tepid worldwide demand and flat earnings growth throughout the overall market. Large cap biotech concerns like AbbVie (NYSE:ABBV) and Gilead Sciences (NASDAQ:GILD) should continue to deliver both earnings and revenue growth in 2016 despite a dismal global backdrop. Both also are priced significantly under the overall market multiple, have great pipelines & balance sheets and pay a nice dividend yield to boot. It is the core reason biotech is the only sector of the market I have as an overweight in my portfolio and I have a 30% cash allocation heading into the New Year.
• The small cap part of the sector has started to perform much better in December as well. A good portion of this is due to the combination of tax loss selling ebbing, as well as bargain hunting and improving sentiment on this portion of the biotech space. I think this continues into the New Year as these small caps in general are sporting significantly lower entry points that they had before the bear market began in July. In addition, M&A activity levels should remain near 2015 record highs for myriad reasons in 2016. I recently detailed these M&A drivers in a free 30 page report on the biotech sector. Relypsa (NASDAQ:RLYP) and Dynavax Technologies (NASDAQ:DVAX) are two of my small cap selections I would not be surprised to see bought out in the first half of the year among other possible targets.
• Investors looking to improve performance in 2016 should seriously consider adding some weighting to this volatile but lucrative part of the market for the above reasons. This is especially true should biotech break out of its recent trading range in coming weeks.
• I would also encourage my real-time followers interested in becoming better biotech investors to give the Biotech Forum investment service a try. This service comes with Seeking Alpha’s 100% unconditional prorated refund policy.
• The Biotech Forum portfolio has also posted a positive return since its launch in April and easily beat its benchmark as well despite enduring a bear market within the biotech sector this summer. As importantly, it has an expanding and vibrant “Live Chat” community where we talk about what is happening within the biotech sector and individual stocks throughout the trading day. I would love to see additional voices be a part of our growing Biotech Forum family.
• With that, I wish all my real-time followers a very happy holiday season as well as a prosperous and healthy New Year.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long ABBV, AMGN, CELG, DVAX, GILD, RLYP.