For the past couple of years, the biotech sector (IBB  ) has been a laggard. Notably, it failed to make new highs despite strength in the broad market between 2017 and early-2020. However, this relative weakness turned into relative strength during the coronavirus crash.

Some reasons for optimism towards the group were discussed in this article. While the sector traded sideways from 2015 to 2020, companies' profits continued to increase, and valuations became very reasonable especially accounting for higher than average growth rates. This period in time, also, led shares to transfer from speculative, momentum traders with short holding periods to patient, long-term investors.

New Highs

During the market's recovery, biotechs have become a leading group. The sector is now 6% above its late-February highs, while most stocks, sectors, and indices are more than 10% below these levels. The catalyst for this move is the coronavirus which is bringing more investment to the sector and highlights the need for drug development. Given the extent of the economic damage as a result of the coronavirus, the value created by an effective treatment or vaccine is incalculable.

Just like the Great Recession and financial crisis has influenced a generation of policymakers, the coronavirus is going to have a long-lasting impact. One potential effect will be the recognition that the cost of prevention is much more manageable than the cost of failure. This increases the odds that some sort of universal healthcare will be passed in the coming decades.

Relative strength during periods of economic contraction and market weakness are good omens for outperformance in the coming months and years. Many technology stocks like Apple (AMZN  ), Apple (AAPL  ), and Netflix (NFLX  ) made new highs early in 2009 and went on to be the leaders of the next bull market. Similarly, materials and energy stocks had already bottomed and were in uptrends when the stock market (SPY  ) bottomed in 2003 and outperformed for the duration of that bull market.

Higher Margins

Another long-term driver of the biotech sector is that the cost of drug development and testing has gone down significantly. At one time, drug development was more of a crapshoot which involved massive costs to test potential treatments. Today, this has changed due to advances in genomics and computers.

Additionally, new markets will open up in the future like personalized medicine and therapeutics. With personalized medicine, drugs can be developed for each person depending on their age, background, and medical history rather than an all-encompassing drug to achieve better outcomes. Therapeutics will allow the diagnosis of diseases faster and with greater precision with less invasiveness and cost.