JMP JMP Group LLC

By Akane Otani 

A rally in biotech stocks could be a sign that investors are becoming more willing to dip into riskier parts of the market again, some analysts say.

The sector has been losing ground for most of the year. It took another hit in the days leading up to the U.K. vote to leave the European Union, as investors dumped risky assets such as stocks while driving up the prices of havens such as gold, government bonds and the Swiss franc.

Yet as global markets rebounded from the surprise outcome of the referendum, with the S&P 500 hitting a record high on Monday, biotech's gains outpaced those of the broader market.

Between June 23 and Monday's close, the Nasdaq Biotechnology Index rose 3.2%, surpassing gains made by all but the S&P 500's utilities shares, which moved up 4.2% over the same time frame. The S&P 500 rose 1.1%.

"I'm not an aggressive growth investor," said David Klaskin, chief investment officer at Oak Ridge Investments in Chicago, which manages $4.3 billion in assets. "But I see these large-cap biotech stocks as having pretty decent upside at the moment."

To be sure, biotech remains a small and volatile part of the stock market. Biotech companies have sometimes wiped out half their value overnight on news of failed clinical trials or rejected products. And the Nasdaq Biotechnology Index, which tumbled last fall when politicians scrutinized drug pricing, is still down 20% for the year.

Biotech's rally suggests investors who had pulled out of riskier sectors before the U.K. referendum are beginning to feel more at ease with them again, analysts said. While dividend-heavy utilities were the best performing S&P 500 sector in the days after the U.K. vote, consumer discretionary and technology stocks, which tend to do well when investors believe the economy will grow, have also been among the biggest gainers in recent sessions.

The shift in leadership among sectors could bode well for biotech stocks, said Mike King, managing director and senior biotechnology analyst at JMP Securities. "This group usually does better with a risk-on mentality, " Mr. King said.

Others say biotech shares have rallied because, unlike certain swaths of the market, they don't take as much revenue from outside the U.S. as others. That means they have been somewhat shielded from the battering more internationally-focused bank, energy and travel stocks have taken after the U.K. referendum.

Some also question whether biotech's recent resurgence is as solid as it seems on the surface. The sector is usually driven higher by mergers and acquisitions, as well as major clinical breakthroughs, Mr. King said. Neither seems to have occurred in the past two weeks, he added.

"It smells such as money sloshing around, rather than new developments in the industry," said Mr. King, who remains bullish on the sector in the long term.

But for now, biotech investors are enjoying the ride. Biotech stocks are cheaper than their historical average, a sign to some analysts that they are ripe for bargains. Biogen was recently trading at 15 times its past 12 months of earnings, nearly half its five-year average of 29 times. Gilead was trading at 7.4 times its past 12 months of earnings, compared with a five-year average of 21.

"Long term, I think the sector is probably looking as good as any other in the market," Mr. Klaskin said.

(END) Dow Jones Newswires

July 12, 2016 11:51 ET (15:51 GMT)

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