On May 29 the iShares NASDAQ Biotechnology ETF (IBB) hit an all-time high of $134.85, breaking the record of $133 set in 2015.
Not surprising with money flooding into the sector as everyone and their Aunt Sally looks to find the stock that will rocket to the moon on the discovery of an coronavirus vaccine or treatment.
Investors and big drug companies are so excited that the ETF has hit this high even in the face of a stampede by biotech companies to sell stock while the selling is good.
For example, an IPO (initial public offering ) for ADC Therapeutics (ADCT) raised $233 million, $80 million more than the initial size of the offer. Modern (MRNA) raised $1.3 billion in a follow on offer after announcing results for a very early vaccine safety trial. Argenex (ARGX) raised $750 million. Bluebird bio (BLUE) raised $500 million.
And the supply of new stock didn’t overwhelm demand by any means. ADC Therapeutics shares climbed 50% on the first day of trading after the IPO.
This indeed seems to be one of those periods when biotechnology attracts a huge influx of cash both from investors and traders looking for a sector that could climb on its company specific news no matter what the overall market does. And when big drug companies decide it’s time to refill their drug pipelines by buying into the most promising candidates at small to midsize biotechs. For example, Pfizer (PFE)–about as big as a big drug company can get–announced last week that it would invest up to $500 million in biotech companies through something called the Pfizer Growth Initiative. Pfizer will look to make non-controlling investments in clinical-stage small to midsize public companies with a focus on internal medicine, inflation and immunology, oncology, rare diseases and vaccines.
Despite the record-setting level on the IBB ETF, it doesn’t look to me as if the sector has topped out yet. The RSI–relative strength indicator–which ranks stocks and ETFs on a scale of overbought–80–to oversold–20–puts the Shares NASDAQ Biotechnology ETF at 60, which is well above the 28 reading back on March 12 near the market bottom but–caveat–matches the 60 reading back in February.
The one thing that worries me here is that a RSI rating of 60 isn’t especially cheap and thanks to the coronavirus vaccine hype there’s a good chance that many of the companies riding high on hopes for a vaccine will tumble hard when it turns out that they haven’t drawn the winning lottery ticket.
That inclines me to want to take advantage of the upward momentum in the sector–thanks to the vaccine hype–but to own a biotechnology company with a promising pipeline of drug candidates (with soon-to-be announced-results of ongoing clinical trials providing near-term catalysts) outside of the coronavirus stampede.
Like what? you ask.
Like today’s Stock Pick of the Day in my next post.