No Bust in Biotech
The once-hot industry has experienced double-digit declines this year, but it’s only a matter of time until it stages an extended revival.
For a large part of this decade, investors had been going gaga for biotech stocks. Between 2010 and July 2015, the S&P 500 biotech sub-industry index climbed by an incredible 360% compared with just 86% for the S&P 500. The gains might have continued but for presidential candidate Hillary Clinton, who mentioned that if she were elected, she would consider curbing drug price increases. Within days, the sector plummeted by 6% and then continued to fall, dropping by 24% between July 2015 and Election Day. Until Nov. 8, it was one of the worst performing sectors globally.
Even with a post-election boost--as of this writing, these stocks have jumped more than 6% since Donald Trump's victory--biotechs are trading at historically low levels. Currently, large-cap biotech stocks are trading at about 17 times 2017 price/earnings. Normally, these companies trade between 15 and 30 times earnings, says Todd Herget, portfolio manager of Columbia Select Large Cap Growth (ELGCX), which earns a Morningstar Analyst Rating of Bronze. And according to Morningstar's Market Fair Value tool, the average biotech stock in Morningstar's coverage area is trading 16% below its fair value; the overall market, meanwhile, is about fairly valued.
Bryan Borzykowski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.