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Vitalii Liubimov's Avatar
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Jun 22, 2020

Mixed Messages on Biotech Sector with Strong Fundamentals, but Overvalued Currently

The current health crisis has created a lot of buzz around the biotech sector as several companies from the sector are working on potential vaccines against the COVID-19 virus. That buzz has created somewhat of a mixed message for the sector as a whole. Many of the companies are overvalued at this time, but the fundamentals of many are really good.

I looked at the SPDR S&P Biotech ETF (NYSE: XBI) and its components. First, I looked at the chart of the ETF itself and saw the huge bounce off of the March low—moving from the $65 area to over $110 in approximately three months. As impressive as the move is, it is also troubling for someone like me that has a hard time buying stocks or ETFs when they are overbought.

After looking at the chart and the move the XBI has made, I started looking at the individual companies and their fundamental ratings along with the scorecard grades from Tickeron. What I found there was pretty impressive.

Of the 85 components in the XBI, 41 are rated as a “strong buy” and 17 are rated as a “buy”. There are seven “hold” ratings, eight “sell” ratings, and 10 “strong sell” ratings. There were also two that didn’t have a rating on the scorecard. I found it to be a really good sign for the long-term prospects of the sector with almost 70% of the ratings coming in at a buy or better. Keep in mind these ratings are strictly based on artificial intelligence, they aren’t the same thing as analysts’ ratings where human opinions are taken in to account.

The problem with the components is that so many are overvalued at this time. Of the 85 stocks in the fund, 45 are “overvalued”, 29 are “fairly valued”, and only 11 are “undervalued”.

The biotechnology industry involves genetic or protein engineering. The goal is to produce medicines or therapies for treating and preventing ailments. The industry also provides crucial ingredients for diagnostics. This multi-billion dollar industry is heavily focused on research and development.  Companies are continuously attempting to come up with cutting-edge solutions for health. New discoveries for the treatment of diseases provide growth opportunities for the companies. However, discoveries must pass regulatory approval from the U.S. Food and Drug Administration (FDA) before they can make it to markets.

Some of the most notable companies in the group are Amgen Inc. (NASDAQ:AMGN), Gilead Sciences, Inc. (NASDAQ:GILD), Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN), Illumina Inc (NASDAQ:ILMN), Biogen Inc (NASDAQ:BIIB), Alexion Pharmaceuticals Inc. (NASDAQ:ALXN), Moderna Inc (NASDAQ:MRNA), Incyte Corp. (NASDAQ:INCY), Exact Sciences Corp. (NASDAQ:EXAS), and Sarepta Therapeutics Inc (NASDAQ:SRPT).

Of those notable companies, only Amgen falls in to the undervalued category at this time. Exact Sciences is fairly valued and all the rest of those notable companies are in the overvalued category at this time.

What all of this suggest to me is that the long-term prospects for the XBI and the biotech sector as a whole are really good. But investors might want to wait for a pullback before jumping in.

One particular technical indicator that jumped out at me was the RSI indicator. Over the last three weeks or so, 36 of the stocks in the XBI have received a signal from this indicator and only four of those 36 were bullish signals with good odds of success. There was one bearish signal that didn’t have good odds of success, but there were 31 bearish signals where the odds of success were at 60% or better. 

Given all of this information, I can see making a bullish trade on the biotech sector if the stocks as a whole see a little pullback. If enough of the stocks go through a little downturn, it should reduce the number of stocks that are overvalued. Such a move would give investors a chance to enter a trade without buying when the indicators are in overbought territory.

Related Ticker: XBI

XBI in upward trend: 10-day moving average broke above 50-day moving average on May 17, 2024

The 10-day moving average for XBI crossed bullishly above the 50-day moving average on May 17, 2024. This indicates that the trend has shifted higher and could be considered a buy signal. In of 15 past instances when the 10-day crossed above the 50-day, the stock continued to move higher over the following month. The odds of a continued upward trend are .

Price Prediction Chart

Technical Analysis (Indicators)

Bullish Trend Analysis

The Stochastic Oscillator suggests the stock price trend may be in a reversal from a downward trend to an upward trend. of 65 cases where XBI's Stochastic Oscillator exited the oversold zone resulted in an increase in price. Tickeron's analysis proposes that the odds of a continued upward trend are .

The Momentum Indicator moved above the 0 level on June 24, 2024. You may want to consider a long position or call options on XBI as a result. In of 93 past instances where the momentum indicator moved above 0, the stock continued to climb. The odds of a continued upward trend are .

XBI moved above its 50-day moving average on June 03, 2024 date and that indicates a change from a downward trend to an upward trend.

Following a 3-day Advance, the price is estimated to grow further. Considering data from situations where XBI advanced for three days, in of 300 cases, the price rose further within the following month. The odds of a continued upward trend are .

The Aroon Indicator entered an Uptrend today. In of 264 cases where XBI Aroon's Indicator entered an Uptrend, the price rose further within the following month. The odds of a continued Uptrend are .

Bearish Trend Analysis

The Moving Average Convergence Divergence Histogram (MACD) for XBI turned negative on June 17, 2024. This could be a sign that the stock is set to turn lower in the coming weeks. Traders may want to sell the stock or buy put options. Tickeron's A.I.dvisor looked at 46 similar instances when the indicator turned negative. In of the 46 cases the stock turned lower in the days that followed. This puts the odds of success at .

Following a 3-day decline, the stock is projected to fall further. Considering past instances where XBI declined for three days, the price rose further in of 62 cases within the following month. The odds of a continued downward trend are .

Fundamental Analysis (Ratings)

Fear & Greed

Tickeron has a positive outlook on this ticker and predicts a further increase by more than 1.00% within the next month with a likelihood of 79%.

Notable companies

The most notable companies in this group are ABBVIE (NYSE:ABBV), Amgen (NASDAQ:AMGN), Regeneron Pharmaceuticals (NASDAQ:REGN), Gilead Sciences (NASDAQ:GILD), Moderna (NASDAQ:MRNA), Biogen (NASDAQ:BIIB), Sarepta Therapeutics (NASDAQ:SRPT), Exact Sciences Corp (NASDAQ:EXAS), Incyte Corp (NASDAQ:INCY), Exelixis (NASDAQ:EXEL).

Industry description

The investment seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index derived from the biotechnology segment of a U.S. total market composite index. In seeking to track the performance of the S&P Biotechnology Select Industry Index (the "index"), the fund employs a sampling strategy. It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index. The index represents the biotechnology segment of the S&P Total Market Index ("S&P TMI").

Market Cap

The average market capitalization across the SPDR® S&P Biotech ETF ETF is 9.61B. The market cap for tickers in the group ranges from 155.35M to 322.43B. ABBV holds the highest valuation in this group at 322.43B. The lowest valued company is CRBU at 155.35M.

High and low price notable news

The average weekly price growth across all stocks in the SPDR® S&P Biotech ETF ETF was 4%. For the same ETF, the average monthly price growth was 6%, and the average quarterly price growth was 3%. ALNY experienced the highest price growth at 42%, while ZNTL experienced the biggest fall at -45%.

Volume

The average weekly volume growth across all stocks in the SPDR® S&P Biotech ETF ETF was 11%. For the same stocks of the ETF, the average monthly volume growth was 38% and the average quarterly volume growth was 10%

Fundamental Analysis Ratings

The average fundamental analysis ratings, where 1 is best and 100 is worst, are as follows

Valuation Rating: 64
P/E Growth Rating: 78
Price Growth Rating: 53
SMR Rating: 88
Profit Risk Rating: 79
Seasonality Score: 21 (-100 ... +100)
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