Gilead Sciences (GILD) bought out Kite Pharma (KITE) for $11.9 billion this week, prompting huge gaps up in both biotech stocks. But it seems the ripple effect of the Gilead-Kite Pharma deal have spread to the entire biotech sector.
Since the mega deal was struck on Monday, the iShares Nasdaq Biotech ETF (IBB) is up 5.6% as of this writing, compared to a 2.3% run-up in the Nasdaq. Prior to that breakout, biotech stocks had been on a month-long decline, and had gone nowhere since a big jump in the first three weeks of June. So it’s clear that the Gilead-Kite Pharma deal has acted as a sort of wakeup call for the entire sector.
Part of that is due to Gilead’s size. With a $109 billion market cap (and climbing) and $28.5 billion in revenues over the last 12 months, GILD already had outsize influence on the biotech sector. By buying out KITE and its $32 million in annual revenue (and $10.2 billion market cap), Gilead became that much bigger.
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Another reason was simply the timing of the deal. It coincided with this week’s run-up in the market as a whole. For a biotech sector desperate for good news, it added up to the perfect storm for biotech stocks.
Going forward, biotechs can only get so much traction out of a single deal in the sector, however big or meaningful it is. But one really good week could be enough to push biotech stocks into a more long-lasting rally. From a technical standpoint, the IBB has already broken out, hitting a 52-week high. And it’s now trading well above both its 25- and 50-day moving averages.
With momentum on its side and technical barriers coming down, a sustained run could be in store for biotech stocks. For all its recent gains, the IBB still trades 21% below its all-time highs around 400 set two summers ago. On a price-to-earnings basis, many biotechs are still cheap. Look at the forward P/E ratios among the four largest companies in the sector by market cap, including Gilead:
Amgen (AMGN): 13.8
Celgene (CELG): 15.4
Gilead Sciences (GILD): 11.0
Biogen (BIIB): 13.5
For a sector that’s known for high valuations, those look like bargain stocks—at least on the surface. And in a market in which sector rotation has been prevalent of late, biotechs are the latest sector to attract a wave of buyers. Combine the reasonable values, momentum derived from the Gilead-Kite Pharma deal and technical strength, and biotech stocks suddenly look like the best place to invest your growth investing dollars.
Now, if you think you need a little help identifying which biotech stocks have the best charts, I’d suggest subscribing to our Cabot Top Ten Trader investment advisory. In it, growth investing expert Mike Cintolo recommends 10 of the market’s hottest stocks every Monday, with a goal of delivering fast profits in a short amount of time. Click here to learn more.
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