Buying Back into Biotech

U.S. stock markets pulled back sharply last week, with the S&P 500 falling 2.22% and the Dow Jones tumbling 2.29%. The MSCI Emerging Markets Index held up better, dropping only 1.55%.

Your Bull Market Alert portfolio fared considerably better as well, with several of your positions eking out a small gain.

Last week, I recommended that you take profits on your leveraged bet on biotech by closing your position in the ProShares Ultra Nasdaq Biotechnology ETF (BIB). Because the position opened down at the market’s open, you only booked a 50.42% gain. Sure enough, BIB endured a strong sell-off and ended the week lower by 10.49% after talk of a biotech bubble spooked investors.

Here’s why I don’t believe biotech is in a bubble and why this week I am recommending that you reenter the ProShares Ultra Nasdaq Biotechnology ETF (BIB).

First, large-cap biotech still trades at lower forward price-earnings (P/E) multiples — and with higher growth rates — than the S&P 500. And last week’s correction brought biotech stock valuations down substantially. Gilead (GILD) — 7.74% of BIB — now trades at just 10.6 times its estimated 2015 earnings. That not only makes it half as expensive as the average Nasdaq stock, but, by that measure, even cheaper than Gazprom, Russia’s state-owned gas company.

Second, biotech’s sales and earnings power have expanded tremendously in recent years. There has been a 10-20% increase in drug approvals by the U.S. Food and Drug Administration (FDA) and the European Medicines Agency. The 13 new drugs approved by the FDA in the first half of 2013 had average peak sales potential of $12.4 billion, or about $1 billion per drug.

Third, dealmaking is driving up biotech stock prices as smaller biotech firms get gobbled up by big pharma. The latest big deal came when AbbVie announced a $21 billion deal to buy Pharmacyclics. So far in 2015, health care and pharma companies have announced $102.3 billion in mergers and acquisitions. That’s the highest total for this time of year since 2009.

Finally, after last week’s sell-off, the entire biotech sector is technically oversold, making now a good time to re-enter the sector. As if on cue, biotech bounced sharply in Friday’s trading.

So buy back Ultra Nasdaq Biotechnology Proshares (BIB) at market today. Because of the volatility of this position, I’ll wait to put a stop on this for now.

If you want to play the options, I recommend the June Market Vectors Biotech ETF $132 calls (BBH150619C00132000), which last traded at $11.30 and expire on June 19.

Portfolio Update

JA Solar Holdings Co (JASO) eked out a 0.61% gain for the week. The company reported solid fourth-quarter 2014 results with both earnings and revenues beating estimates. It also witnessed a 43.2% year-over-year increase in total shipments in the quarter. Analysts at Roth Capital set an $18.00 price target on shares of JA Solar Holdings Co. That’s a whopping 82% upside from Friday’s close. JASO is a BUY.

VIX Short-Term Futures ETN iPath (VXX) closed the week a hairsbreadth higher, up 0.04%. Volatility has remained exceptionally low even during the weeks that the market has pulled back. This has made it hard to generate profits on this position. I’ll be looking to exit this bet on any day of a severe sell-off, so keep an eye out for a special alert. VXX is HOLD.

Japan Hedged Equity WisdomTree (DXJ) fell 0.96%. I’ve been looking for a pullback in this position to place an options bet. But thanks to the steady drumbeat of the rising Nikkei in 2015, this has been hard to do. DXJ is a BUY.

The Bank of Ireland (IREBY) ended the week 0.93% higher as the euro gained back some of its losses against the U.S. dollar. The International Monetary Fund (IMF) reported this week that the Irish economy is firing on all cylinders and is expected to grow at 3.5% in 2015 after having surged 4.8% in 2014. IREBY is a BUY.

Newly Updated Special Report

As a courtesy, I invite you to view the newly updated version of The Top 12 Stocks for 2015, which features three of my top investment recommendations from the recent Orlando MoneyShow, as well as bonus picks from each of my fellow investment newsletter editors at Eagle. This report and others are available FREE on my website to you.

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