What’s Ahead for Biotech Stocks?

I’ve been watching the biotech sector closely over the past few months.
And like most investors, I’m wondering about the next move. Will the decline that has plagued the high-beta sector since late February continue? Or is now a good opportunity to “buy the dip”?
From a technical standpoint nothing could be more worrisome than a breach of the 200-day moving average. For the first time in 351 days the NASDAQ Biotechnology index (NBI) closed below the popular long-term trend indicator, the third-longest streak in its 20-year history.

Regardless of your thoughts on the fundamentals of the sector, the 200-day must not be ignored. Since the fall from grace in late February, the index has dropped roughly 20%, an area where the index has managed to rally each and every time over the next two weeks. And in fact, the index has lived up to its historical precedent, rallying roughly 7% since testing its 200-day moving average…so far, so good.
But there are a few other factors that increase the probability of a continued push lower.
Back in mid-March, Bloomberg reported that the percentage of IPOs announced with no earnings had reached 74%, the second-highest percentage in history. The key driver to the record-setting percentage is the push for biotech stocks, namely IPOs. According to Bloomberg, over the past year there have been over 20 money-losing biotech companies that have announced an IPO.
This is notable because there has only been one other time in history that equaled the high percentage of money-losing IPOs and the returns were extremely poor over the next year.
Again, whether the sector is in a bubble remains up for debate, but admittedly the outlook weighs more to the downside.
If we are indeed in a bubble, I expect we are in the “bull trap” phase of a financial bubble.

Source: Hofstra University

The key is keeping a close watch on the 200-day moving average. Again, if NBI manages to push below the long-term trend line with conviction, expect to see significant losses going forward. I’m talking in the 30%-to-50% range. A 30% loss below the 200-day would take us down to roughly 1615 in NBI, levels not seen since in over a year.
Our own Wyatt Research’s esteemed analyst Tyler Laundon was recently asked if he thought biotech stocks were cheap, expensive, or somewhere in between. His answer is quite compelling.
“On a valuation basis, biotech looks good to me. If we look at consensus estimates for 2016, the four largest biotech companies trade at just 13.5-times earnings, versus 14.2-times for the S&P 500.
These companies are growing far faster than the S&P 500 … over the next three years revenues should grow at 18% a year, versus 4% for the S&P, and earnings by 30% per year, versus 6% for the S&P.
So let me ask you a question: Would you buy into a sector where net margin is 2.6 times that of the S&P 500, which is growing EPS five-times faster and growing revenue 4.5-times faster, and that’s trading at a 5% discount based on 2016 estimates?”
Tyler’s been right on in his assessment of the biotech stocks so far this year.  He just doubled his subscribers’ money with a small-cap biotech stock named Endocyte (NASDAQ:ECYT), and his subscribers are up 30% with Gilead (NASDAQ: GILD) in just a few months.
Obviously whether the sector is in a bubble or not is up for debate. The next week should give us a good idea where the index is headed over the intermediate term. If NBI can manage to stay above the 200-day. we could see stellar returns going forward. If not, well, I think you know the verdict.

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