• ETFs

    The Trump-Bump in Biotech

    Gabor Gurbacs, Data Analyst, ETFs
    November 14, 2016
     

    In the two days following the 2016 election results, large cap biotech stocks, as measured by the MVIS™ US Listed Biotech 25 Index (MVBBH), posted returns of 9.6% with many underlying stocks venturing into double-digit return territory. Among the top performers, Ionis (IONS) collected 30.2%, Alnylam (ALNY) mustered 21.8%, and Bluebird (BLUE) posted 18.8% return. Other large biotech names such as Gilead Sciences (GILD), Allergan (AGN) and Amgen (AMGN) performed with the rest of the majority of the large cap biotech market that is within the 5%-30% return range.1

    Economic Policy May Benefit Large Biotech Stocks

    Biotechnology’s sudden “Trump-bump” after Election Day is not surprising. In the past year, amidst increasing political campaign pressure and Hillary Clinton’s enduring health care pricing-structure criticisms, large biotech stocks came under undue pressure and consequently experienced a sharp price decline. The pressure eased the morning after Election Day as industry experts expect President-elect Trump’s pro-business stance to be beneficial for the biotech industry. His plan highlights business tax rate cuts from 35% to 15%, repeal of the Affordable Care Act incurred taxes on health care companies and wide-ranging cash repatriation initiatives, all three of which would potentially benefit large and profitable biotech companies.2

    Large Biotech Stocks are at More Attractive Valuation Levels

    Is this “Trump-bump” phenomenon enough to warrant investors to look at biotech stocks again? While event driven market reactions can sometimes be fleeting, it’s worth noting that large cap biotech valuations have become more attractive since peak valuations in mid-summer 2015, as the price to earnings ratio of large biotech stocks decreased 46% from 27.8 on 7/31/2015 to 15.0 times earnings as of 11/10/2016. Recently, valuations of the largest biotech stocks have diverged significantly from the broad industry.1

    On a price-to-fair value basis, large biotech stocks traded at a 22% discount on average.3 Familiar names such as Gilead Sciences (GILD) traded at a 30% discount, Allergan (AGN) 29% and Amgen (AMGN) 25% compared to their respective fair value estimates. Also noteworthy is that the aforementioned three stocks carry Morningstar’s “wide-moat” designations meaning that Morningstar believes these firms have strong competitive advantages that may allow them to protect long-term earning potential. Moat designations are not uncommon to the large cap biotech industry; 13 out of 25 stocks in MVBBH are moat-rated, of which 5 companies carry “wide-moat” designations.4

    Amid current political developments and valuations, investors may consider targeting large biotech companies via an exchange-traded fund such as the VanEck Vectors™ Biotech ETF (BBH) to potentially capture value and latent opportunities in the biotech industry.

    View BBH's Current Constituents

    Large Biotech Stock Valuations Diverge from the Broad Industry
    12/31/2015 – 11/10/2016

    >Biotech Stock Valuations

    Source: FactSet. Past performance is no guarantee of future results.