Every bear market is followed by a bull market… just as spring inevitably comes after every winter. Sure, it’s easy to lose sight of this fact in the middle of a relentless bear market, but investors need to realize that great opportunities are just around the corner. And NOW is the time to prepare. I delve deeper into these thoughts below, revealing the sector that I believe will yield the highest gains for investors when the bull starts to run again. Read on below for details.
One of the most reliable ways to find the best opportunities for the next bull market run is to focus on the sectors with the best combination of growth, value and catalysts. The use of this strategy in the previous decade would have led investors to focus on SaaS or internet stocks.
Many of the top names in these sectors gained more than 1,000% during the previous bull market. Of course, investors will have to find new stocks in new territories to achieve such returns during the next bull market.
Today I want to talk about the biotech sector and discuss 3 reasons why every investor should pay attention.
While so many parts of the market have become wildly overvalued, biotechs are an exception, as the entire industry was stable between 2015 and 2022.
BUT, only the stocks were flat. Earnings have actually EXPLOADED.
The best way to see this is the weighted average P/E for the biotech ETF, IBB, which went from 83 in 2015 to 12.5 today.
From a more qualitative perspective, we can see that the IPO market has dried up along with the influx of retail investors and institutions. In fact, nearly 25% of small- and mid-cap biotech companies have more cash on hand than their actual market caps.
Typically, investors can only find attractive valuations in dull sectors with limited growth prospects.
Biotechs are a rare and notable exception.
The population in developing countries is aging rapidly. There is the famous stat that Japan sells more adult diapers than baby diapers. Well, this will also be the reality for the US and Europe in a few decades.
Due to the aging population, the demand for new medicines will also increase. There are always new innovations in the space that lead to better outcomes in diagnosis and treatment.
Healthcare spending also continues to grow faster than the economy as a whole.
This is also a trend that will not abate any time soon as a large part of this is subsidized by the government. And there is no political will on either side of the aisle to change this arrangement.
An attractive growth and value environment will arouse the interest of investors. But learning about the powerful catalysts in the game will turn this interest into an obsession.
Most potently, we are now in an environment of slowing growth. At the start of the year, inflation posed the greatest threat to the economic outlook.
This has now been replaced by a recession. The best proof of this is that interest rates are moving lower over the longer term, along with forward-looking inflation indicators.
This is an unforgiving environment for most stocks, but manna for biotech. The bottom and top lines of these companies are decoupled from economic or monetary conditions. As the economic outlook deteriorates, money will flow from cyclical markets to sectors more isolated from the business cycle.
Another catalyst for the sector is the bare pipelines and flush balances of large pharmaceutical companies.
This places a bid below the biotech sector, as these companies depend on the biotech sector for the innovation that will bring the next generation of blockbuster drugs.
Finally, the most exciting catalyst is this exact innovation. Over the past decade, the cost of drug development has fallen due to computer modeling and a better understanding of diseases and the human body. This leads to better margins and results.
These technologies also serve as a bridge to a future of personalized medicine. The first step is to improve the diagnosis in terms of accuracy and speed. This is where we are today.
The most exciting part of the biotech space is in the micro-cap and small-cap areas, as these are the companies with the most potential. As mentioned above, many trade at valuations that are lower than the cash on their books.
Most investors simply don’t have the time or inclination to spend serious amounts of time and energy learning about the nuances of different biotech companies.
That’s why we do the heavy lifting (and thinking) to identify the highest quality companies in the biotech space.
What to do?
Our POWR Shares Under $10 Service is committed to this ‘niche’ that is being ignored by Wall Street and the majority of investors. It is specifically designed to consistently find these types of companies and other winning low-priced stocks.
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All the best!
Chief Growth Strategist, StockNews
Editor, POWR Shares Under the $10 Newsletter
SPY shares closed at $395.09 on Friday, down $-3.70 (-0.93%). Year-to-date, the SPY is down -16.20%, versus a % increase in the benchmark S&P 500 index over the same period.
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR growth and POWR Shares Below $10 newsletters. Read more about Jaimini’s background, along with links to his most recent articles.
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