I screen the market every night looking for strong fundamental and technical stocks. One thing I try to identify is themes and leading sectors. Over the past two months, I have noticed more and more Biotech stocks showing up on my screens. Not only are they setting up technically, but they are also breaking out and producing strong gains. There are three main reasons for this:

1) During the Presidential election, both sides discussed lowering drug prices and this weighed on the entire sector for over 18 months. In June 2017, news came out that the Trump administration was working on industry-friendly policies (such as accelerated approval of new treatments) instead of more aggressive proposals. Wall Street interpreted that the focus would be on removing barriers to entry rather than on attacking drug prices.

2) On August 28th, Gilead Sciences purchased Kite Pharmaceuticals for close to $11 billion. This all-cash buyout was at a 30% premium! Not only was this a signal that Biotech was making a comeback, but it was also a big boost to the Gene Therapy group. On September 25th, Barron’s gave further credibility to the sector in an article titled: Gene Therapy Is Nearing a Major Breakthrough.

3) The industry widely considers new FDA head Scott Gottlieb as more lenient than past commissioners. A recent Bloomberg headline said he is taking advantage of policy groundwork laid in the past few years to speed drug approvals. For example, 34 new drugs (treating everything from cancer to rare genetic diseases) have been approved so far this year. That’s on pace to nearly double last year’s approvals.

Many investors don’t like the risk associated with individual Biotech stocks. One way to reduce that risk is to consider one of the sector ETFs such as IBB or XBI. Of course, I don’t recommend chasing any stock or ETF after it has made a strong run, but it is worth keeping this sector on your radar as we will likely see more upside over the long-term. Good luck!

I can be reached at: jfahmy@zorcapital.com.

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