Biotech: 3 Reasons The Recent Selloff Is A Buying Opportunity For XBI (Upgrade)

seekingalpha11-20

Biotech had its worst weekly performance since 2020 last week, driven by the post-election rally fizzling and fears surrounding RFK Jr.'s potential impact on the FDA.Concerns about Mr. Kennedy leading...

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his confirmation is uncertain, and his focus may impact the food sector more than biotech.The biotech sector appears oversold with little “froth,” especially compared to the overall market, suggesting a buying opportunity for long-term investors.I highlight some key reasons the biotech sector represented by SPDR® S&P Biotech ETF is now oversold and how I am acting with the XBI ETF and other plays upon the recent pullback in the sector in the paragraphs below.   Bill Oxford  Biotech had its worse weekly performance since 2020 last week. As illustrated by the chart below of the SPDR® S&P Biotech ETF (NYSEARCA:XBI), it was a tough week for the sector. This ETF is getting close to support levels that have largely held here in 2024.   Seeking Alpha There were a couple of reasons for the sharp decline. First, the post-election rally fizzled to a large extent late last week. By the end of the week, the NASDAQ (COMP:IND) had fallen 3.2% on the week and the small-cap Russell 2000 (RTY) was off better than four percent. The second driver of the decline was due to the fears and uncertainty of what effect RFK Jr. being appointed as head of Health and Human Services will have on the FDA and on the entire healthcare space. However, there are several reasons to believe the sector is now in oversold territory and presents longer-term investors with a buying opportunity. Let's go into factors that support that thesis. Fears Of RFK Jr. Are Overblown: I can understand the knee-jerk reaction to this nomination given Mr. Kennedy is a long-time vaccine skeptic who has consistently criticized the healthcare sector over the decades. He threatens to shake up the status quo at the FDA. However, first he will need to be confirmed, which is hardly a sure thing. Given his consistent focus on vaccines, some large drug names that are in the vaccine space like Pfizer (PFE), Moderna (MRNA) and Merck (MRK) could continue to have some headwinds for a while. Mr. Kennedy has also been critical in the past about a lot of funding for the FDA coming from the pharma industry it is supposed to regulate, so that might come under some additional scrutiny as well. As could approvals for drugs that are very expensive but only extend lives by a few months. However, given Mr. Kennedy's intense focus on nutrition and concerns about obesity, it is the Food part of the FDA that might be more impacted by Kennedy's leadership. Kraft has pulled the two Lunchable options that the FDA just approved last year for the national school lunch program despite some concerns about high sodium levels, citing lack of demand. I could easily see the food processing industry coming under significantly higher focus should Mr. Kennedy take over at HHS. There Isn't Much “Froth” In The Biotech Sector:   Bloomberg, Rosenberg Research One can easily make the case that the overall market was in overbought territory, before last week's sell-off across equities. I, personally, believe the overall market is still significantly overvalued. With the 10-Year Treasury yield (US10Y) above 4.4%, there is no equity “risk premium” to holding stocks currently (see above).   S&P 500 historical price to earnings ratio (Macrotrends) The S&P 500 (SP500) trades north of 26 times earnings. This is one of the most elevated valuation readings for the index over the past 90 years.   S&P 500 historical price to sales ratio (Multpl) On a price to sales ratio or overall market cap to U.S. GDP ratio, the SPDR® S&P 500® ETF Trust (SPY) is in uncharted territory.   Current Market Valuation Meanwhile, it is difficult to argue there is much “froth” in small-cap and midcap biotech/biopharma stocks, especially compared to the overall market. As you can see below, the SPDR® S&P Biotech ETF basically trades at the same levels as it did in mid-2018.   Seeking Alpha Tax Loss Selling Is Ebbing: Finally, tax loss selling is ebbing. Many fund managers' fiscal years end on October 31st. Given biotech vastly underperformed the overall market yet again in 2024 year to date, there were a lot of small and midcap biotech stocks that saw tax losses being “harvested” over the past couple of months. This was a headwind to the sector. Now that a good portion of that selling is completed, it should benefit the biotech sector overall, and this area of the market could well experience the “January Effect” in the weeks ahead.  I have used the pullback in biotech to up my exposure to this oversold sector via covered call orders. Both around biotech ETFs like the SPDR® S&P Biotech ETF and the iShares Biotechnology ETF (IBB) as well as targeting individual stocks. These include Mirum Pharmaceuticals (MIRM), which reported wonderful Q3 results and raised guidance last Tuesday, but whose stock still got caught up in the recent sell-off in the market and biotech sector.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484820976"}