Is the Biotech Bounce for Real?

02/17/2016 8:45 am EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

Since this biotech ETF bounced and then biotech stocks also moved higher, many investors are wondering if the biotech sector has found a bottom and if this rally is for real, so Michael Berger of Technical420.com shares his take and highlights a pair of sector favorites, yet he also illustrates why he would not rush to make a buy order.

After the iShares Nasdaq Biotechnology (IBB) ETF bounced off of its new 52-week low, biotech stocks also moved higher. This move higher has left investors wondering if the biotech sector has found a bottom and if this rally is for real.

Biotech stocks have seen heavy weakness during 2016 as macroeconomic concerns and the focus on drug pricing has resulted in one of the most dramatic negative fund flow environments ever seen by the sector.

This weakness has decoupled biotech stocks from their fundamentals and we expect to see fundamentals begin to matter in the near future. This overarching theme has created several opportunities in the biotech sector and we want to highlight two of our favorites.

Two Biotech Favorites

Biogen, Inc. (BIIB) has fallen more than 16% during 2016 and we think shares are set up for a significant rally once fundamentals matter again. BIIB is financially flexible and is one of the best at allocating capital in an accretive manner.

Although many investors expect to see BIIB announce a dividend, we do not expect that to happen. Instead of issuing a dividend, we expect to see BIIB acquire several companies that are currently trading at a discount. This would be a more appropriate move for this growth-oriented biotech company.

GW Pharmaceuticals (GWPH) remains a favorite of ours following the company's fourth quarter earnings announcement. GWPH is the only cannabis company traded on the NASDAQ which provides visibility, liquidity, and financial transparency.

We believe that GWPH represents an attractive investment for the following reasons: 1) Expects to announce positive phase 3 Epidiolex data in March, 2) Weakness related to the accounting issue is overdone, 3) Releasing several data readouts during 2016 which will serve as event-driven catalysts, 4) Continues to build out United States operations, and 5) Valuation is attractive at current levels.

Don't Expect Smooth Sailing

Although we are glad to see IBB and biotech stocks come off of their recent lows, we would not rush to make a buy order. Once fundamentals start to matter again, investors should expect to see several biotech stocks rally significantly.

Michael Berger, Founder and President, Technical420.com

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