BiQ: Of Bulls, Bears, and Biotech

I've seen several social media posts recently with some enthusiastic analysts and bloggers posting about how biotech is on the brink of another major bull run. I don't want to rehash what's already been posted; however, I thought it might be useful to provide some additional perspective on where I think biotech stands right now, and how I approach my own investing.

If we take a look at the chart below, we can see a pretty clear XBI trendline going back over 10 years.

As a long-time biotech investor, I am very bullish about biotech over the long term. However, I think it's dangerous to invest under the belief that biotech is staged for some kind of major breakout. Many investors, and some prominent authors I know, who may have started their biotech investing careers just prior to the 2020 biotech bubble, may not have a clear idea of how normalized biotech markets should behave. What happened from 2020 to 2021 was not "normal", it was a bubble, driven by extreme enthusiasm and excess market liquidity. While bubbles happen regularly enough, and a biotech bubble could certainly happen again, I don't think having such expectations is a prudent way to approach investing.

The blue line in the chart is the SPX, and we can see that the SPX started to significantly outperform the XBI around mid-2022. However, this outperformance was (and continues to be) driven primarily by a small handful of names, which we all know as the Magnificent 7. We would see a very different chart if we excluded just those seven companies.

The red line in the chart is the RUT, or the Russel 2000, which is a good indicator of small-cap performance, and generally correlates reasonably well with the XBI. Comparing the RUT with the XBI demonstrates that small-cap bios have actually performed quite well compared to the overall universe of small-cap stocks.

Biotech, like any other industry, has a mix of names: some are very cheap, while others appear too expensive. Inexpensive names can always get more inexpensive, and expensive names can always get more expensive. I never try to predict what happens in the near term, because near-term price movements are driven mainly by sentiment. What one must try to do, however, is to try to find the best opportunities, watch them carefully to make sure the thesis is progressing, regardless of what the share price might be doing, and perhaps most importantly: have patience.

This is par for the course. But on a broader level, I don't think one can say that biotech, as a whole, is necessarily very cheap compared to the broader market. In my opinion, investors should remain cautious and continue to focus on only the highest quality names with clear value propositions, where the valuation remains attractive. I think there is still upside, but one needs to be very picky. This is what I focus on at Biotech iQ. (To see my performance since launching Biotech iQ, please visit the Performance page on the www.biotechiq.net website.)

I think biotech remains a very attractive sector to invest in, but it's fraught with pitfalls and is highly volatile. Knowing when to hold on and when to sell can be very challenging, and stock-picking and proper analysis remain critical. This shouldn't discourage anyone, but it's important to proceed with caution. I'm still bullish, and I think there are a lot of attractive setups, but I'm expecting a lot of volatility. It's probably a good idea to keep the FOMO in check.

Please refer to the BiQAP Live spreadsheet on the Active Portfolio page or the iQCS for additional information.

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Biotech iQ is not an investment professional, and nothing on this page or this website should be considered investment advice. Please consult with a licensed investment professional as necessary. Past performance is not indicative of future results.