On Wednesday, the Federal Reserve slashed interest rates by 50 basis points (0.50%). It was a highly anticipated moment. And now that the speculation is over, it’s time to position our portfolios accordingly for the next year and beyond.
As you can see in the chart below, the biotech sector – as measured by the SPDR S&P Biotech ETF (XBI) – has greatly underperformed the S&P 500 over the past five years.But over the past year, XBI has managed to outpace the S&P 500 by several percentage points.
Does that mean the tides have shifted in favor of biotech stocks in anticipation of lower interest rates? And more importantly, are biotech stocks a good investment for the next few years?
The answer to both questions is yes.
Biotech stocks are a must-own sector in any portfolio. Let me explain…
A large majority of biotech stocks aren’t profitable. That means they must rely on borrowing money to fund research in the hopes of gaining approval for potential drugs.
The rise in interest rates over the last few years has increased the borrowing cost for biotech companies. Higher rates combined with negative sentiment in the sector has led to historically low exposure from hedge funds.
According to investment firm Goldman Sachs’ Prime Book – which tracks hedge fund investments – the long/short position ratio on biotech stocks is in the 13th percentile for the next 12 months.
Looking further out at the next five years, the sector falls to the bottom 4th percentile.
So if and when money starts coming back into the sector, it will create a new long-term sustainable uptrend. In fact, the charts indicate that there may already be some accumulation – with a lot more money capable of flowing into the sector.
That means it’s time to start adding some biotech stocks to your watch list…
I’m happy to share a few of my own below. To be clear, I don’t personally own any of these stocks, nor have I recommended them in my newsletters. But these names should give you an idea of where to look when the time is right.
Viking Therapeutics (VKTX) is a biotech with a drug candidate in the Glucagon-like peptide-1 (GLP-1) area for treating obesity.
Structure Therapeutics (GPCR) is a pharmaceutical company that also has a drug candidate for the treatment of obesity.
And Recursion Pharmaceuticals (RXRX) is a biotech firm that combines artificial intelligence (AI) with drug discovery. It also has its own pipeline of early-stage drug candidates. The company received a small amount of money from Nvidia (NVDA) last year, but the stock has been struggling lately.
Again, these three stocks are not recommendations. They’re just some ideas to get you thinking about biotech stocks and the upside potential in this space in the years ahead.
Here’s to the future,
Matt McCallEditor, Market Insights
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