Biotech Sector Stands to Win As Fed Rate-Cut Cycle Begins
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Now that the Fed has all but handed us their rate-cutting intentions, let’s continue to forecast – and position ourselves in – the companies and sectors poised to win.
Today, I’d like to introduce a bullish forecast for the Biotech sector. Here’s the rationale:
With rates at a 20-year high, the potential for the first rate cut in 4 years could catalyze a better operating environment for the biotech sector
You see, with rates so high, a collection of the top biotech stocks has gained only +4.6% annualized over the last 5 years – while the S&P 500 has gained +16%. That’s dramatic under-performance.
Why is that?
Nearly 80% of the companies in the SPDR S&P Biotech ETF (XBI) must raise cash to continue their research and development initiatives and create new drug candidates and trial results.
A downtick in rates will significantly help their burn rates.
Case in Point: The XBI has a very strong negative correlation to interest rates. In other words, when rates are rising, this sector tends to underperform.
And when rates are falling, this sector tends to outperform. Headed into 2025, the business environment should only get stronger for the entire biotech sector.
The same bullishness should apply to the iShares Biotechnology ETF (IBB) as well.
One Specific Name I Like: Gilead Sciences (GILD).
This past week, shares traded at their highest levels since January, and could be ready to approach recent highs around $85.
If you recall, GILD was so good at their job – that they cured Hepatitis C- and the stock suffered because they eliminated their drug’s revenue stream. As a result, the stock has largely been range-bound since 2016.
With the stock trading at 13x their 12-month forward earnings, they’re getting zero credit for their pipeline. That’s why many consider GILD to be a low-expectation, inexpensive, and under-owned stock.
It could be the cheapest biotech stock on the market right now – which could lead to a nice play headed into a stronger interest-rate environment for biotech stocks.
YOUR ACTION PLAN
Earlier today, I initiated a new trade inside The War Room to get positioned in the biotech sector. Is the trade on XBI? Or IBB? Or was it on GILD – or maybe a different biotech stock altogether? There’s only one way to find out.
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