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A year ago, I published an article on the iShares Nasdaq Biotechnology ETF (IBB), in which I dismissed the thought that IBB is the best fund to play the expected growth of the biotech sector. Since then, the fund has outperformed the S&P 500 Index by 3%.

Source: Seeking Alpha

I introduced investors to SPDR Biotech ETF (XBI), which I thought would outperform IBB because of its high concentration on small-cap stocks representing this business sector. Below is a comparison of returns between these two funds and the broad market in the last 12 months.

Data by YCharts

IBB has outperformed both the market and XBI over the last 12 months. However, up until the beginning of 2020, XBI had provided better returns than both the index and IBB, which was consistent with my expectations.

Twelve months and a pandemic later, I believe IBB is the best fund to hold for the next 12 months for reasons that are discussed below.

The major catalyst that would drive healthcare stocks higher in the next few months is the possibility of developing a vaccine or a drug to fight the novel coronavirus. However, such a product is unlikely to be invented by a small biotech company. This is not to say that the chances of such an occurrence are nil, but collectively, the big names in the industry have a better chance of finding a cure.

Here is a list of companies that are working to develop a cure for COVID-19 and their market capitalizations.

Source: MarketWatch

As evident from this data, the majority of companies who are actively working to develop a cure are billion-dollar companies. Governments and other responsible authorities, on the other hand, prefer to work with these companies because of their strong track record of previously working with state authorities to fight pandemics and other outbreaks.

IBB is a fund that primarily invests in large-cap biotech stocks, making the fund tailor-made to benefit from the expected surge in healthcare stock prices once further developments are announced of the fight against COVID-19.

IBB market-cap data

Source: Morningstar

The exposure to small and micro-cap biotech stocks are non-existent, which is a characteristic I did not enjoy a year back. However, the outbreak of the novel coronavirus, in my opinion, has changed the healthcare investing landscape considerably and tilted the odds in favor of large companies.

The top-10 holdings of IBB further highlight that the fund is invested in companies that are already researching for a product to fight the virus.

Source: Seeking Alpha

The thinking behind many investors is that the spread of COVID-19 will come to an end in the next couple of months, paving the way for global economic growth to return to its normalcy. However, things might be a bit more different than that. Even if the United States, along with other regions that are hammered by the virus, curb the spread of the virus, the repercussions of the pandemic will be felt throughout 2020.

Biotechnology companies will continue with their effort to develop a cure and different stages of their clinical trials will unfold for many months or years to come. Therefore, healthcare stocks are likely to be driven by pandemic-related developments for the entire year.

Is buying IBB better than buying the one company that will, for sure, develop a vaccine successfully to put an end to the novel coronavirus? Most certainly not, but no investor would be able to predict what company or companies would be successful in their efforts. Identifying which company would win the race and become the first to develop such medicine is even more complex. Therefore, an investment in IBB seems to have the best risk-reward profile to play the uncertainty, while gaining necessary exposure to the biotechnology sector.

Even if things continue to go South and none of the companies emerge victorious in this race to find a cure for COVID-19, the billion-dollar companies can still survive and reward investors in the long run, as opposed to a small-cap company whose stock price has shot up over the last few months based on expectations for a successful trial to fight the novel coronavirus. Almost all component companies of IBB have deep pipelines that could bring in billions of dollars in revenue in the coming years. Therefore, an investment in IBB is a less risky bet on the highly volatile biotech sector. This makes IBB even more attractive.

Biotech stocks are not for everyone because of the significant level of business uncertainty. An investor who is keen to gain exposure to the expected surge in healthcare stock prices should consider IBB because of its risk-reward profile and the long-term prospects of the companies the fund has invested in.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

See the original post here:
A Bear Turning Bull On IBB Based On Recent Developments - Seeking Alpha

This entry was posted on March 31, 2020 at 5:47 am and is filed under Biotechnology. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. |