Here’s Why Investors Should Consider Biotech, Pharmaceutical Stocks

The financial markets are not the most pleasant and calm place right now. It's facing risks in multiple areas such as geopolitics, inflation, and economic growth. There's also the matter of strategies no longer working that reliably worked for traders and investors.

For more than a decade, tech has been an outperformer and a magnet for capital. This has been disrupted by inflation and rates. Growth stocks have gotten cheaper but not cheap enough to entice value investors. More cyclical parts of the economy are vulnerable to a slowdown. And, companies across the board are dealing with inflation eating into margins and earnings.

However, there is one part of the market that investors have been ignoring but are offering very attractive valuations in addition to strong, long-term growth characteristics. These are biotech and pharmaceutical stocks.

Both groups have underperformed the market since 2015. This is starker in biotechs which were also pulled lower by the selloff in growth stocks. In contrast, pharmaceutical stocks have outperformed in 2022 due to their above-average dividend rates, strong balance sheets, and stable revenues, making them a good fit for these challenging market environments.

The situation with biotechs is even more compelling. After being bull market leaders from 2009 to 2015, they have traded flat for the last 7 years. Many biotechs are trading at valuations that are less than cash on the balance sheet, while sentiment surveys show little interest from institutional and retail investors.

And, this is a big change from what we saw in 2015 which had many of the same excesses of 2020 and 2021 but in the biotech space. Companies with barely a track record were able to IPO for billions. There were buyouts at inflated valuations. And, many of the stocks were trading with a triple-digit price to sales multiples.

Now, sentiment is bearish and valuations are very favorable. Further, the long-term fundamentals of both sectors remain strong given the aging population and steady growth in healthcare spending. Further, there are constantly new and exciting innovations that are leading to more effective treatments and diagnosis with research being done on interventions that would prevent diseases.