Biotech stocks and exchange traded funds have endured a lengthy rough patch. And the pain has been particularly acute for small- and mid-cap fare. Over the past three years, the S&P Biotechnology Select Industry Index, which is chock full of smaller biotech stock, shed nearly 45%.
That’s a staggering loss. Especially considering that over the same span, broader gauges of large, mid, and small-cap equities posted healthy gains. In other words, it’s understandable why investors may be pensive about ETFs such as the ALPS Medical Breakthroughs ETF (SBIO ) – a fund that focuses on the SMID biotech arena – but some market observers believe now could be the time to revisit biotech equities.
To its credit, SBIO performed less poorly than the S&P Biotechnology Select Industry Index over the past three years. That might now be saying much. But it could be a sign that SBIO could be a leader if biotech stocks finally get in gear.
SBIO Has Advantages
Regardless of the market capitalization segment, it’s rare that biotech stocks are inexpensive. Typically, lofty valuations are the price of admission investors pay to access shares of companies working on potentially game-changing drugs and therapies. For investors considering SBIO today there’s good news. SMID biotech names are among the cheapest fares in the space.
“The pain was even worse for small/mid (SMID) cap biotechnology and medical technology stocks, where a bear market of more than two years has driven enterprise value to revenue (EV/R) multiples to the bottom end of their 10-year historical ranges,” noted BNP Paribas.
Valuation alone isn’t the sole determinant of an ETF’s worth. But a case can be made that valuations are so depressed on some SBIO firms that opportunity is knocking. Loudly at that. More importantly, some of the factors that stood in the way of biotech stocks are falling by the wayside.
“We see this as an opportunity for investors as we believe many of the factors that led to healthcare’s underperformance in 2023 are either improving or about to. And because strategic acquirers appear both motivated and financially able to act,” added BNP Paribas.
Integral to the SBIO thesis is an attractive regulatory environment. All of the ETF’s holdings have at least a drug or therapy in Phase II or III trials.
“The regulatory backdrop remains very supportive of biotechnology and medical device companies. The evidence for this is the continued high rate of drug approvals and device approvals by the US Food and Drug Administration (FDA) – which is critical for the fundamentals of the most innovative companies in healthcare,” concluded BNP Paribas.
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