Biotech stocks have taken a beating the last few months, down roughly 35% since peaking in July of last year. And for good reason I think. Biotech at the top was sporting a pretty rich multiple, 25 times forward earnings for the biotech stocks in the S&P 500 and a lot more than that for the ones that aren’t. Now, having lopped 35% off the top, the forward P/E for the large cap, S&P 500 biotechs is just a bit over 12 (according to Ed Yardeni’s research). For the iShares Biotechnology ETF, the trailing P/E is around 21. Unfortunately they don’t offer a forward number but considering the expected growth rates for most of these stocks – roughly 19% for the industry as a whole – the trailing multiple is about right.
This is a volatile sector with standard deviation in the mid-20s so it isn’t for the faint of heart, but if you believe in the power of technology you have to at least start considering these. From a technical perspective the iShares Biotechnology ETF (IBB) is as oversold as it was at the end of 2008. Our preferred long term momentum indicator has not turned up yet though so caution is warranted. The intermediate version is still on a sell too although short term momentum has turned positive.
