Why Should We Invest in Biotech Stocks This Year

Depending on when you invested in biotech stocks, these picks could be either the best thing or the worst thing about your portfolio.

From early 2013 to mid-2015, the sector went on an amazing run; while the S&P 500   gained about 50%, major biotech ETFs like the iShares Nasdaq Biotechnology Index ETF  and the SPDR S&P Biotech ETF roughly tripled.

Of course, that all changed dramatically. After peaking in July 2015, both the XBI and IBB biotech ETFs were off by as much as 40% come February 2016. And even now, after a modest recovery, the funds remain down about 30% from their peak almost two years ago.

Many investors got burned by what they saw as a biotech bubble and have no interest in repeating the experience. But others have tasted the profits this sector can deliver and think the time is ripe to get back in now that biotech stocks have stabilized after the selloff.

If we’ve learned anything about Trump, it’s that his public rhetoric doesn’t always equal follow-through in policy — and a recent meeting with industry execs also featured promises of less regulation and faster approvals. What’s the real story? Nobody knows, honestly, but Washington generally seems to be moving toward lower taxes and less regulation.

While some picks are seeing top-line pressures, many biotech stocks have growth stories that are unmatched elsewhere on Wall Street. Take Celgene Corp. which just saw strong fourth-quarter sales growth of 16%.

It’s also important to remember that because of Wall Street’s negative view on biotech, these stocks have been deeply discounted vs. prior norms in the sector. Take one-time darling Biogen Inc. , which has seen its shares go nowhere for about a year and a half.

While companies face specific challenges based on their drug approvals and patents, the good news is that once a biotech stock creates a successful treatment, it is very difficult to unseat that company.

The hope of a big buyout premium has lured many investors into smaller biotech stocks over the years. Sometimes those deals never transpire, but in 2017, those hopes of big-time acquisitions could prove well-founded.

It’s also worth pointing out that while many investors focus on Big Pharma heavyweights loaded with cash — such as Pfizer Inc. sitting on roughly $24 billion in cash and investments.

Its hard to try to pick individual winners, particularly among the smallest biotech stocks. There are many unknown risk factors such as the result of FDA trials. Therefore, I recommend a broad investment in the sector via the SPDR S&P Biotech ETF, which trades as XBI.