The One Place to Make a Fortune in the Market Right Now
By Ian Davis
July 28, 2008
Biotech stocks are finally emerging from their two-year doldrums...
Between late 2005 and early 2008, the biotech sector slumped along, dropping about 15%. But since March, when I told you to keep an eye on the industry, biotech stocks have popped about 20%. Take a look:
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The Start of Another Triple-Digit Rally?
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As my colleague Rob Fannon pointed out, one catalyst for this breakout is Swiss drug company Roche's buyout offer for blue-chip biotech Genentech. The stock has gained about 24% since July 14, despite the company's disappointing second-quarter earnings release.
Bullish price movement in the face of bad news is a good sign for the industry. And when the biotech sector enters a bull market, investors who pull the trigger early can make a fortune. Since 1983, biotech stocks have exploded higher in four triple-digit rallies and one quadruple-digit rally.
As a whole, the sector sells for 34.2 times earnings right now. That may sound high, but it's not. Over the last 20 years, the sector's median P/E was 53.2, 55.6% above its current level.
Remember, biotech companies are growth stocks. Many operate in the red as they work on their potential blockbusters. Think of them like small metals and energy exploration companies. These outfits tend to have little to no earnings... but a lot of growth potential when they hit it big.
The following chart shows just how cheap biotech companies are today...
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Biotech Is Cheap Right Now
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If you can pick out tomorrow's blockbuster drugs, you'll probably make enough money in the next biotech bull market to retire in luxury.
But you can also buy into the trend without hiring a team of medical experts... One way is through a biotech ETF, like the SPDR S&P Biotech ETF (XBI). You can also buy one of the larger, less-volatile biotech companies like Amgen (AMGN).
Good investing,
Ian Davis
