In the past few years, a strange new “defensive” asset has appeared in the
market.
Investors use the “defensive” label to describe businesses that enjoy steady
demand for their products - like food, cigarettes and electric utilities. The
thinking goes, you want to own these sectors when the economy stinks. Their
sales and cash flows should hold up better than retailers and hotel chains when
consumers are broke.
Considering we’ve just had the worst credit crisis in 80 years, and one of
the worst-ever bear markets in stocks, the new “defensiveness” shown by biotechnology stocks is
extraordinary.
Biotech is typically a wild sector. Most people don’t think of it as place to
find safe stocks. But have a look at the accompanying chart, which tracks the
SPDR S&P Biotech ETF (XBI)
over the past two years. This fund has big holdings in the 10 or so large
biotechnology companies that have viable products bringing cash in the door.
As the chart shows, the XBI ETF is actually higher today than it was back in
2007. You can’t say that about oil, real estate, retail stocks, food stocks,
tech stocks, gold stocks, or financial stocks.
The strength in biotech shares is confirmation of something I’ve been
predicting for the past few months: We’re due for huge rally in biotechnology
stocks.
Biotech companies are much different than giant pharmaceutical companies like
Pfizer Inc. (PFE) or Merck & Co. Inc.
(MRK).
Biotech firms make their drugs from living cells, rather than from mixtures of
chemical compounds. Biotech drugs treat life-threatening diseases - so
recessions barely dent sales growth. People can pass on the cholesterol-lowering
effects of Lipitor
for a while, but stopping a cancer treatment can kill a patient in weeks to
months.
And because most biotech drugs are made from living cells, they’re hard to
copy. Right now, the U.S. Food and
Drug Administration (FDA) has no approved pathway for generic
biotech drugs. While Big Pharma is struggling with dwindling pipelines, big
biotech companies are profitable, have growing sales, are generating tons of
cash, and face no generic competition in the near term.
