Back to Biotech

04/15/2015 9:00 am EST

Focus: ETFs

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

I don’t believe biotech is in a bubble; on the contrary, I am recommending that you reenter the sector via this recommended exchange-traded fund, explains Nicholas Vardy, editor of Bull Market Alert.

We are buying ProShares Ultra Nasdaq Biotechnology ETF (BIB). Large-cap biotech still trades at lower forward price-earnings (P/E) multiples and with higher growth rates than the S&P 500.

And the recent correction brought biotech stock valuations down substantially. Gilead (GILD)—which represents 7.74% of BIB—now trades at just 10.6 times its estimated 2015 earnings. That makes it half as expensive as the average Nasdaq stock.

In addition, biotech’s sales and earnings power have expanded tremendously in recent years. There has been a 10-20% increase in drug approvals by the US Food and Drug Administration (FDA) and the European Medicines Agency.

The 13 new drugs approved by the FDA in the first half of 2013 had average peak sales potential of $12.4 billion or about $1 billion per drug.

Third, deal making is driving up biotech stock prices as smaller biotech firms get gobbled up by big pharma. The latest big deal came when AbbVie (ABBV) announced a $21 billion deal to buy Pharmacyclics (PCYC).

So far in 2015, healthcare and pharma companies have announced $102.3 billion in mergers and acquisitions. That’s the highest total for this time of year since 2009.

Finally, after the latest sell-off, the entire biotech sector is technically oversold, making now a good time to re-enter. So buy back Ultra Nasdaq Biotechnology Proshares at market.

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