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Biotech Stocks: Unappreciated Drivers of the Nasdaq





Biotech Stocks:
The Unappreciated Drivers of the NASDAQ’s Leadership






Pacifica Partners’ Financial Post Weekly Column – March 19th 2010


This and other articles also available online at: Financial Post & Investment Waves Blog



When the economy is emerging from recession, the markets tend to gravitate towards “Early Cycle” themes. These are the segments of the markets that are the first to feel the benefits of an uptick in economic activity. Semiconductor and related technology stocks are one part of the “early cycle” segment of the market.

To that end, investors will watch for the technology stock laden NASDAQ to begin to exert leadership over other broad market indices such as the S&P 500. As the chart below shows, the NASDAQ began to outperform the S&P 500 almost five months before the S&P 500 made its bear market low.

It would stand to reason then that this would be because the market was able to factor in the idea that the economy would begin to bottom and early cycle stocks were a good place to be. However, a look at the facts gives a somewhat surprising reason for the outperformance of the NASDAQ over the S&P 500.

Biotechnology stocks, which comprise a significant portion of the NASDAQ’s market value but less than technology stocks, are not typically thought of as early cycle stocks. Yet, they have been quietly outperforming the market for quite some time. In fact, even before the financial crisis began to make waves, the outperformance of the biotechnology stocks against semiconductor stocks (Figure 1) and the broader market (Figure 3) was already underway. Surprisingly, the semiconductors which should be outperforming the NASDAQ are thus far underperforming (Figure 2). Put another way, Figure 2 shows that the NASDAQ is outperforming computer chip stocks.




TED Spread vs. S&P 500

TED Spread vs. S&P 500

(Click on chart to enlarge – Data Source: Stockcharts.com)


However, investors should be careful with this sector as it can be exceptionally volatile. The last two years has seen a good deal of merger and acquisition (M & A) activity as the large pharmaceutical companies have looked to smaller biotech companies to help refill their product pipelines. The largest biotech company is Amgen with a market value approaching $60 billion. Despite this strong outperformance, the biotech sector seems to be attracting very little attention from many investors.

In addition, the current health care debate has left the markets trying to grapple with who the winners and the losers will be if and when health care legislation is passed. The thinking amongst some market analysts is that as the number of individuals who will qualify for medical coverage increases as a result of the health care reform bill, the industry will benefit. In addition, certain provisions of the health care reform bill would allow biotech firms to receive twelve years of competitive protection from lower cost, generic competitors. This should prove beneficial to their profit margins.

In light of this weekend’ historic health care reform vote in the US, investors may want to give this forgotten sector a second look.







Legal Disclaimer

This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.



Copyright (C) 2010 Pacifica Partners Inc. All rights reserved.



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