Use Weakness in Biotech as an Opportunity

By Ian Cooper

The biotech sector has been under immense pressure.

But don’t write it off just yet.

Granted, the SPDR S&P Biotech ETF (XBI) is down from about $105 in mid-November to a recent low of about $92. The iShares NASDAQ Biotechnology ETF (IBB) slipped from about $150 to less than $132. Even ProShares Ultra NASDAQ Biotechnology (BIB) dropped from about $68 to a low of $52.

There were a couple of reasons for the decline.

One, markets saw a post-election fizzle. The Dow Jones Industrial Average slipped about 3% and is heading lower again. The S&P 500 Index dropped about 3%, as the NASDAQ Index fell by 4%. Two, the biotech sector slipped on fear and uncertainty of what effect Robert Kennedy, Jr., as Secretary of Health and Human Services, could have on the US FDA.

Fear has Been Priced Into the Biotech Sector

In fact, as reported by Reuters on Nov. 15:

“Kennedy has been most vocal about the FDA, an agency that oversees nearly $3 trillion in medicines, food and tobacco products. In interviews and on social media, Kennedy has accused agency staff of doing the bidding of Big Pharma and Big Food. ‘FDA's war on public health is about to end," Kennedy wrote on X in late October. "If you work for the FDA and are part of this corrupt system, I have two messages for you: 1. Preserve your records, and 2. Pack your bags.’”

However, a good deal of the uncertainty and fear of his nomination has been priced in.

Plus, a lot of fear has become overblown. As noted by Wired.com in late October:

“Kennedy wouldn’t have free rein though. Existing laws and regulations govern how the agency works, and a new FDA commissioner wouldn’t be able to get rid of those quickly. Likewise, even in a leadership role at HHS or the CDC, Kennedy wouldn’t be able to easily affect vaccine policy. Vaccine recommendations are made by the Advisory Committee on Immunization Practices, which comprises outside medical and public health experts.”

Fear Also Created a Buy Opportunity

Fear creates opportunity.

Sir John Templeton would tell investors to buy excessive pessimism.  

Warren Buffett still advises that a “climate of fear is your friend when investing; a euphoric world is your enemy.”  And of course, we all remember his advice to “be fearful when others are greedy and greedy when others are fearful.”

Baron Nathan Rothschild would tell investors, “The time to buy is when there’s blood in the streets, even if the blood is your own.”  He knew that very well, considering he made a small fortune buying the panic that followed the Battle of Waterloo against Napoleon.  

All of which applies to the biotech sector.

We also have to consider that the biotech sector is cheap, as compared to the excessively frothy, overbought broader market. 

Again, don’t write biotech off just yet. Instead, use the recent pullback as an opportunity.

One way to trade potential upside in biotech is by buying to open the XBI January 17, 2025 94 calls at market this morning.

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Ian Cooper makes use of technical, fundamental and news analysis, to help individual investors grow their wealth. He’s a firm believer that hard work and thorough research will lead to investment success. He is currently ranked 234 out of 30,327 financial bloggers analyzed by TipRanks, with a 19.2% return on his buy and sell ratings.