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This Speculative Sector Is Still Booming

By Larsen Kusick, analyst, Phase 1 Investor
Monday, April 9, 2012

One by one, the "speculative" uptrends are falling over like dominoes.
For some investors, the stock market is doing great. Early last week, the S&P 500 closed at its highest level since May 2008. Dividend-paying stocks and Apple (which is basically its own asset class now) have led the way.
But many of the speculative "boom and bust" sectors we write about so much in Growth Stock Wire are struggling.
Over the past three weeks, a number of "boom and bust" areas took a dive. Oil services stocks (OIH) plunged 9%. Gold stocks have plummeted to new 52-week lows. Emerging markets like Brazil (EWZ) and China (FXI) are down 6% and 5%, respectively. The big homebuilder uptrend has stalled. After rocketing 60% since October, the homebuilder fund (ITB) is unchanged over the past two months.  
Amid all this "shaky" action, one of my favorite speculative sectors is doing fine – biotech stocks. While most risky sectors sold off the past few weeks, the Nasdaq Biotech Index gained more than 2%... and reached a new 52-week high.
You might be thinking, "2% doesn't sound like much... so what?" 
Well, when a group of stocks moves higher (or even moves sideways) in a weak market, that's called "relative strength." It's a signal that there are "big money" investors behind certain stocks.
I mentioned relative strength back in 2010, ahead of big moves in cloud computing stocks and gene sequencing leader Illumina.  
Relative strength is often a good sign that a sector has extremely strong fundamentals. That's the case with biotech right now. Specifically, big pharmaceutical companies need to replenish their drug pipelines... and they only have one option: buying smaller biotech companies that have attractive drugs in development.
Two months ago, I told readers about the billions of dollars in the vaults of big pharmaceutical companies.  
I said, "Big Pharma executives realize the only way to boost revenue growth, while earning a reasonable return on their investment, is to buy biotech assets at distressed prices... I expect the sector to jump off these low valuation levels once drug companies start opening their wallets." 
Two weeks ago, the news leaked out that Amylin Pharmaceuticals (AMLN) had turned down a $3.5 billion bid from Bristol-Myers Squibb (BMY). Shares rocketed 54% on the day of the news.
The fact that Amylin turned down Bristol-Myers' offer is interesting because it's the same story as the other major deal of 2012. In late January, Roche made a hostile bid to buy Illumina for $5.8 billion. After Illumina said no, Roche raised its offering price by 15%, to $6.7 billion.
Last week, Illumina's board rejected the new, higher bid.  
The takeaway here is that smaller biotech companies know they're sitting on valuable assets. Unlike profitable companies, it's harder to pin an "exact" value number on them. The most common way that value is "realized" is when a big drug company moves to buy the company.  
For investors, there's an important trend here. If these recent "rejections" are any sign, Big Pharma companies are going to have to shell out more money to snatch up biotech companies.  
It's also notable that these recent deals are small compared to mega-deals like Roche's $47 billion purchase of Genentech or Sanofi's $20 billion acquisition of Genzyme.  
In short, there's a lot of money out there chasing a limited supply of biotech companies. This strong fundamental story is showing up in the charts. This tells us that, should the broad market keep rising over the next year or two, biotech stocks are a great way to play it.
Good investing, 

Further Reading:

If Big Pharma companies put more of their money to work in the biotech space, we could see huge uptrends in the sector... and soon. Learn more here: The Biotech Bull Market Is Just Getting Started. Here's Why...
Growth Stock Wire Classic: "We see biotech stocks as one of the market's great 'boom and bust' sectors," Editor in Chief Brian Hunt writes. "When these stocks enter bull markets, they easily shoot up hundreds of percent." Read more about how to recognize a biotech bull market here: If You Want Out of Conventional Investments, Start Right Here.

In The Daily Crux
Market Notes
Big Tech uptrend continues... Microsoft, IBM, Intel, and Cisco are all up 20%-plus over the past year.
Europe's troubles still looming... Spanish stocks sink to a three-year low.  
First Solar breaks down to a fresh all-time low.
Hyped-up IPO Groupon continues downtrend after last week's accounting scandal... shares break down to a 52-week low.
Market Watch
Symbol Price
S&P 500 1398.08 -0.1% +4.9%
Oil (USO) 39.26 +1.1% -8.9%
Gold (GLD) 158.31 +0.7% +11.5%
Silver (SLV) 30.72 +1.3% -19.9%
U.S. Dollar 80.04 +0.4% +5.3%
Euro 1.31 +0.2% -8.6%
Volatility (^VIX) 16.70 +1.7% -3.2%
Gold Stocks (^HUI) 441.07 -0.9% -26.1%
10-Year Yield 2.17 -3.1% -37.8%

World ETFs
Symbol Price
USA (SPY) 139.79 -0.1% +7.1%
Japan (EWJ) 9.83 +0.0% +0.8%
Singapore (EWS) 12.67 -0.3% -4.5%
S. Korea (EWY) 60.31 +0.7% -6.8%
S. Africa (EZA) 66.65 +0.9% -7.9%
Taiwan (EWT) 12.98 +1.0% -10.5%
Lat.America (ILF) 46.83 -0.2% -12.1%
Israel (ISL) 13.70 +0.5% -15.4%
Canada (EWC) 27.71 -0.6% -17.3%
China (FXI) 37.00 +1.0% -18.0%
India (IFN) 22.25 +0.6% -30.6%
Russia (TRF) 16.35 +0.5% -32.9%

Sector ETFs
Symbol Price
Retail (PMR) 25.71 +0.9% +24.3%
Big Tech (QQQQ) 67.72 +0.6% +19.7%
Consumer Svcs (IYC) 80.72 +0.5% +14.2%
Health Care (IYH) 78.14 +0.1% +14.2%
Big Pharma (PPH) 73.61 +0.6% +14.1%
Utilities (XLU) 34.89 -0.7% +12.6%
Real Estate (IYR) 61.51 -0.4% +7.3%
Biotech (PBE) 22.59 +0.4% +1.9%
Industrials (IYJ) 70.56 -0.4% +0.2%
Transportation (IYT) 94.16 +0.1% -1.2%
Financials (IYF) 57.77 -0.2% -1.4%
Defense (PPA) 19.85 -0.8% -1.6%
Media (PBS) 14.89 +0.1% -1.7%
Software (PSJ) 26.70 +0.4% -2.5%
Insurance (PIC) 16.25 -0.1% -3.0%
Internet (HHH) 70.21 +0.1% -3.8%
Telecom (IYZ) 22.07 -0.1% -4.8%
Construction (PKB) 13.80 -0.4% -5.0%
Water (PHO) 18.90 -0.6% -7.0%
Semis (PSI) 15.65 +0.4% -11.1%
Oil Service (OIH) 121.00 +2.4% -11.4%
Basic Mat (IYM) 69.14 -0.6% -15.4%
Nanotech (PXN) 6.39 +0.6% -33.1%
Alt. Energy (PBW) 5.24 -1.0% -49.8%

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