Just a few months ago in March 2014 the bears were out in full force calling for a biotech meltdown. The sector had been the best-performing one in the S&P 500 index for multiple years in a row. In 2013 alone, it bested the index by nearly 20%, posting a full-year gain of 48%.
Given biotech’s volatility this spring, many investors avoided the sector like the plague.
But avoiding the volatility has been costly. Those investors that stuck with biotech, or bought into the weakness, have been well compensated. Biotech is up 20.5% this year versus 7% for the S&P 500. That means biotech is outperforming the market by nearly 3-times.
Investors need to remember that new blockbuster drugs deliver EPS growth for years for large biotech stocks. And robust drug pipelines are starting to deliver as new drugs hit the market in 2014 and 2015.
Currently, my largest personal biotech holding is Gilead (Nasdaq: GILD). This is largely a result of a sizeable position in the Fidelity Advisor Biotechnology (FBTAX) mutual fund, as well as some exposure outside of the fund.
I like Gilead because of the potential of the company’s hepatitis C drug, sofosbuvir. In December 2013, the FDA approved the company’s sofosbuvir pill to treat hepatitis C, and the drug has absolutely crushed expectations.
I also like Celgene (Nasdaq: CELG), a $57 billion company with leading therapies for various forms of cancer. The company’s largest product is the blockbuster multiple myeloma therapy Revlimid, which generated 66% of sales in 2013.
If my estimates prove accurate, then Celgene will have delivered average annual growth of 25% over a decade-long period from 2007 to 2017. You’re not going to find this type of performance in many other sectors.
In addition to owning these stocks myself I’ve been advising subscribers of Top Stock Insights to buy. Over the last year we’re up 75% with Gilead Sciences. And since recommending Celgene in March, when biotech stocks were getting hammered, we’re up 27%.
Incidentally, both of these investments are handily beating the market, too. Since we added Gilead to Top Stock Insights portfolio the stock has outperformed by 56%. And since we added Celgene, that stock has outperformed by 21%.
I think biotech has a durable rally going here so my advice remains the same – ride the rally until there are more dramatic signs of a major reversal and/or until biotech stock fundamentals get too far out of whack to justify holding them.
With big gains over the past couple of years, I believe many investors are simply looking at the charts and wondering if these stocks can go higher. I doubt many are diligently building growth models, and evaluating valuation metrics over the next four years. That’s a mistake.
There will come a top to this rally, but I don’t think we’re there yet. And holding on through a massive bull market means that when a reversal comes, you can be a little late to sell and still beat the market.
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