Healthy Earnings Growth Sustains Pricey Biotech ETFs

ETF Trends

Shaking off a spring swoon in growth stocks, the biotechnology sector exchange traded fund has surged back and reached a new high. Despite some concerns over pricier valuations, earnings growth continues to support the sector.

The iShares Nasdaq Biotechnology ETF (IBB) fell over 20% in six weeks during the spring but has since gained 28.1% since the April 14 low. So far this month, IBB has gained 10.2% and is hovering near a new high. [So Much for That Biotech ETF Bubble]

Strong gains in large biotech firms like Gilead Sciences (GILD), Celgen Corp (CELG) and Amgen (AMGN), which combined make up 26.6% of IBB’s underlying portfolio, have helped lift the broader sector.

“Earnings are just growing at phenomenal rates that you really can’t find in other industries,” Ziad Bakri, an analysis at T. Rowe Price Group Inc., said in a Wall Street Journal article.

Moreover, many of these biotech companies have strong competitive advantages, or economic moats, that will continue to help these firms thrive. [InterMune Acquisition Could Ignite These Biotech ETFs]

“For the most part, these large caps have everything you would want in a really good business. They have really good management, they have pricing power on their drugs, and they basically have monopolies in limited areas, with little competition,” Bakri added.

For instance, Gilead’s stock shares jumped after a strong sales launch for its hepatitis C pill.

Due to biotech’s improved bottom lines, analysts’ expectations on earnings have also increased. Bulls argue that the earnings growth outlook tops every other sector. Last month, Gilead reported a five-fold increase in second-quarter profits year-over-year.

The Nasdaq Biotech Index is trading about 32% cheaper relative to analysts’ next-12-month profit forecasts, compared to the last time it hit record highs. IBB’s stock portfolio shows a price-to-prospective earnings of 25.9 and a price-to-book of 6.2. In comparison, the S&P 500 has a 17.0 P/E ratio and a 2.3 P/B ratio.

Overall, biotechs are “definitely not cheap but I wouldn’t say they’re crazily expensive either, when you look at the multiples on these companies relative to earnings growth rates,” Bakri said.

iShares Nasdaq Biotechnology ETF

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For more information on the biotech sector, visit our biotechnology category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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