Biotech: "It's Time to Buy"

06/17/2005 12:00 am EST

Focus:

Steve Sjuggerud

Founding Editor, DailyWealth

As a true contrarian investor dedicated to finding out-of-favor, value-oriented situations, Steve Sjuggerud will patiently wait for the right opportunities. He now says, "For the first time since I started True Wealth in 2001, it's time to buy biotech." Here's his review.

"Biotech stocks now meet our True Wealth criteria. They're cheap, hated, and now finally in an uptrend. I first mentioned back in April that we were getting close. We're finally there. First, biotech stocks are cheap now, or at least as cheap as they've been since 1998, before they took off on an incredible 600% run. If we look at the two giants of biotech, Amgen and Genentech, we find that these stocks are now 60%-70% cheaper today than they were five years ago, based on such factors as price-to-sales and forward price-to-earnings multiples.

"Granted, things got out of hand during the tech boom, and biotech stocks were swept up in it. While biotech stocks went crazy from 1998 to 2001, it doesn't show in the sales numbers for the biotech companies. Sales at Amgen and Genentech were steadily higher every year. There was no wild boom in their businesses during the bubble, and there has been no bust either in these businesses in the last five years- just rising sales, every single year, for both companies.

"However, most investors in biotech have lost money over the last five years. Investors have now really given up on biotech. Good evidence of this are the assets of the Rydex Biotech Fund (RYOIX), our new recommendation. In 2000 at the peak, investors had put $1.4 billion dollars into this fund. But recently, there was less than $100 million dollars invested in this fund. Said another way, this fund currently has over 90% fewer assets today than it did five years ago. Wow! This tells me that biotech is as hated as it can be right now.

"Lastly, the uptrend has begun. Biotechnology stocks (as measured by the BTK index) recently closed 4% above their 40-week moving average. It will be the first time in 2005 that this has happened. Biotech stocks often do incredibly well after this occurs. This positive price action tells me that the uptrend in biotech is finally here. This big event doesn't lead to triple-digit returns every time it happens. But, this has happened nearly every time we've gotten triple-digit returns in biotech. It's time to buy the Rydex Biotech Fund, using a 25% trailing stop. Finally, triple-digit returns are possible once again in the biotech sector."

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