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The Next Big Biotech Bull Market?
08/05/2013 10:00 am EST
Since the 1980s, biotechnology stocks have seen four bull markets with triple-digit gains; Nicholas Vardy explains why a fifth biotech bull market may be underway.
Steven Halpern: We are here today with Nicholas Vardy, editor of The Global Guru, the Bull Market Alert trading service and the longer term focused Alpha Investor Letter. Thank you for joining us from London today.
Nicholas Vardy: Thanks for having me.
Steven Halpern: You recently released an in-depth report on the biotech sector and you noted that since the 1980s, there have been four bull markets, each of which had triple digit gains. Is the good news in the past, or can investors expect a fifth biotech bull?
Nicholas Vardy: Well, based on the way the biotechnology sector has behaved, both last year, and this year, I think we may be very much at the start of the fifth major biotech Bull Run.
If you look at the way the Nasdaq biotechnology index has performed so far this year, as of August 1, it's basically up by 43% for the year, versus about 18% for the S&P 500.
So you're seeing some massive outperformance in this sector, in the biotechnology sector, and it's a trade that I've had on my service a couple of times last year, and I've recently reentered it with a couple of positions in my trading services as well.
So the bottom line is, yes, I think there are some terrific opportunities in the biotechnology sector, and it's driven by a handful of factors which are really crucial in driving this bull market forward.
Steven Halpern: You note that part of the attraction with biotech happens to be problems that are faced by the large pharmaceutical companies. Could you explain that?
Nicholas Vardy: Yeah, well, you know, the big pharmaceutical companies have a couple of issues. First of all, they're facing what they call the patent cliff.
A lot of the major drugs that were developed by the major pharmaceutical companies, the patents on them are now expiring, which means that they will be subject to; the price will be falling as generic versions of those drugs come onto the market.
In addition, these companies have trouble being very large companies focusing on very nimble efforts at R&D—research and development of new drugs—because, in many ways, many of the low hanging fruit—in terms of the major drugs—has already been plucked.
And now these pharmaceutical companies need to get into drugs that address diseases related to aging, and those are more complex, more specialized drugs, and they're having trouble actually focusing those R&D efforts on these new areas.
Essentially they're using the biotechnology industry as kind of a farm team, like outsourced R&D, which offers a lot of opportunity for investors, when the larger companies look at the biotechnology companies to acquire.
Steven Halpern: For investors looking to participate in the biotechnical market, would you recommend that they focus on individual stocks or do you prefer that they take the ETF approach?
Nicholas Vardy: Well, you know, there are really two ways to play the biotech investing game. First, you can focus like a laser on one particular idea and bet big on a single stock and then wait for your ship to come in.
That's the approach with the biggest potential upside, but also comes with cost of tremendous volatility. I do this occasionally with recommendations in my trading service and you get some very big gains very quickly.
But I think if you're betting on the biotechnology bull market; in other words, a ten to one—a 10-bagger, as it were—over the span of a couple of years, I think using exchange traded funds are really the way to go.
The exchange traded funds really focus on some of the bigger companies. They tend to be a bit more stable; at the same time, in the recent bull market, they've also been the best performers in the market as well, so I would really focus more on the exchange traded funds sector.
Steven Halpern: For your subscribers and for your own trading, are there any particular ETFs that you find that investors should be looking at?
Nicholas Vardy: I think probably the most straight forward bet is really looking at something like the iShares Nasdaq Biotechnology Index, exchange traded funds with the ticker symbol (IBB) which invests in a diversified portfolio of about 120 different stocks.
It's very much weighted toward some of the bigger stocks in the sector—Gilead Sciences (GILD), Amgen (AMGN), Biogen (BIIB), Celgene Corporation (CELG), Onyx (ONXX), which just received an unsolicited $10 billion bid, just in the past few weeks, and that would be really the best way to minimize your specific or company risk.
Now what's also interesting about the bull market this time around is that, because of the advent of exchange traded funds, there's actually a leverage way to play this exact same theme.
There's basically a double leveraged version of the iShares NASDAQ Biotechnology Index exchange traded funds, which is the Pro Shares Ultra NASDAQ Biotechnology ETF, the ticker symbol for that is (BIB).
Now there are challenges with exchange traded funds because of the extensive volatility and the daily release in the price—but in a bull market you will see a massive, and I do mean massive, outperformance with respect to the underlying index.
And if you just look at the way BIB, the Ultra Nasdaq Biotechnology fund, has performed in the past year, it's really been quite remarkable.
The underlying investment thesis is that we're in this bull market and biotechnology is something that you can hold onto for a longer period of time and really generate some quite impressive gains in the next 18 to 24 months, looking ahead.
Steven Halpern: Well, thank you for taking the time to be with us today.
Nicholas Vardy: Thanks for having me, Steven.
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