Will Biotechs Benefit as New Capital Floods Into Stocks?

Tech stocks may have caught a breather last week, and the S&P 500 may have dipped. But investors didn’t miss a beat.

They were busy flooding the stock market with new capital!

As of last Wednesday, $24.6 billion worth of inflows had poured into equity markets. That was the second-highest amount ever, behind only the post-election rally period.

Clearly, market weakness gave investors who had been watching (and missing) the rally a chance to dive into stocks – and they took advantage of it.

One group of stocks really caught a bid from the influx of new money: The beleaguered biotechs. The sector had been bogged down by political risk, hostile drug pricing rhetoric, and uncertainty over health care reform.

But after a 25% decline from previous highs, biotechs looked relatively cheap.

All they needed was a catalyst, and recent new drug news from Clovis Oncology (CLVS, Rated “D-”) appears to have been it. So this sector is definitely on my radar screen.

Just take a look at the main ETF that tracks biotechs, the iShares Nasdaq Biotech Fund (IBB, “Rated C”). The chart pattern looks bullish, and portends a convincing break out above resistance at the key $300 level.

That also would complete a bullish triangle pattern, which I’ve identified below:

Bottom line: IBB could have a long way to go to the upside, now that it’s catching investor inflows.

So to help you take advantage, I’ve provided a list of the highest-rated stocks in the IBB to help narrow your search for where to look.

Data Date: 6/19/2017

Still, be mindful of the risks associated with speculative biotechs. They can sometimes pose binary hit/miss payout patterns with asymmetrical probabilities.

Or in simple terms, if a drug gets approval, shares of the company that makes it will soar.  If it gets rejected, its shares will tank.

There’s usually very little middle ground.

Best,

Mandeep

Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.