Beaten biotech space is now incredibly cheap

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After disappointing in 2021, biotech stocks and exchange-traded funds are bombarded this year, with growth stocks losing popularity due to rising interest rates.

As experienced biotech investors know, the industry frequently trades at premiums to the broader market, and extreme discounts are rare. However, this is the scenario at work today, which could be a sign that opportunities are available with funds such as the Invesco Nasdaq Biotechnology ETF (IBBQ).

IBBQ tracks the Nasdaq Biotech Index, the most advertised biotech stock benchmark. While valuation alone is no reason to buy or sell a stock, it’s hard to ignore the fact that the underlying IBBQ index is currently home to a slew of downright cheap stocks.

“Nearly 200 of these North American-based companies have negative enterprise values, meaning their liquid assets are worth more than their market values,” reports Cristin Flanagan for Bloomberg.

Specific to the Nasdaq Biotech Index, around 20% of its 370 constituents are currently trading below cash. The conditions for promoting biotechnology do not arise very often. In fact, the data referenced in the aforementioned Bloomberg article goes back 20 years, and discounts of this nature have not been observed during that time.

The Nasdaq Biotech index’s upside opportunity is particularly pronounced among the smaller constituents of the benchmark. The 20% of the index that trades for less than cash have a combined capital of $20 billion, but combined market values ​​of just $11 billion, according to Bloomberg.. Cancer drug makers, some of which reside in the IBBQ portfolio, are badly bruised and heavily discounted.

“Oncology companies trade at a median of 0.7x enterprise value to cash, compared to 1.1x for those pursuing other diseases,” Bloomberg notes.

The average market value of IBBQ’s 370 constituents is $47.35 billion – a figure that is skewed by around 52% of those stocks classified as large caps. However, there is more value in the ETF than many investors expect. Approximately 39% of IBBQ’s holdings in the large, mid and small cap sectors are considered value stocks, according to Invesco data. That’s a staggering percentage for a biotech ETF.

Speaking of value, IBBQ only charges 0.19% per annum, or $19 on a $10,000 investment, making it one of the most cost-effective options in the biotech ETF landscape.

For more news, insights and strategy, visit the Nasdaq Investment Intelligence Channel.

Opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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