Large-cap biotech will offer a smoother ride than small, and Vertex, in particular, looks attractive.
Biotech stocks began the year in much the same way they ended it—by getting hammered.
Vertex Pharmaceuticals, however, held its own, and that may be reason enough to start nibbling at its shares.
The sector had a terrible 2021. The
exchange-traded fund (ticker: IBB), which weights its holdings by market capitalization, rose 1%, its worst year since 2018, while the equal-weighted
SPDR S&P Biotech
ETF (XBI) fell 25%, its worst year since at least 2007. This year was supposed to be better, but so far it’s been anything but, with the iShares ETF down 7.9% through Friday’s close and the SPDR ETF off 8%—their worst starts to a year since 2016. Blame it on the hawkish minutes from the Fed’s December meeting.
Still, there are reasons to believe that things could get better. For starters, biotech stocks almost never have two bad years in a row. The last time the SPDR ETF suffered a drop of 15% or more was in 2018, and the fund followed it up with a 33% increase in 2019. It dropped more than 15% in 2016 and followed that up with a 44% rise in 2017.
The selloff has left more than 70 companies with more cash than their combined equity and debt, observes Baird analyst Brian Skorney, the most he has ever seen. “With the excitement of someone catching a falling knife, our view is turning optimistic on biotech outperformance going forward,” he writes. “Acknowledging structural risks remain, we think the sector is now well into oversold…