Biotech Is a Strong Sector With Growth Potential

With biotech stocks up 78% from March lows many investors may be staying away thinking the sector is too expensive.

Biotech stocks are not cheap but they are no where near peak valuations. As these companies continue to innovate and excite investors the valuations are likely to become richer before the end of a major long term rally.

These companies are never cheap using the classical definition of value. The high growth and high excitement keeps valuations elevated relative to other business sectors. Biotech investors understand this situation and always expect to pay up for the best ideas. However, right now compared to history Biotech is not overvalued today.

The sector currently trades at a price to sales ratio (PS) of around 7.5. For most sectors a 7 price to earnings is very expensive and possibly bubble territory. However, for biotech it has been about average.

At the peak of the dot-com bubble, biotech had a PS ratio of around 20 and during the 2015 peak these companies sported at PS ratio of around 10.

So while biotech is not a classically cheap at today's valuation it certainly has value compared to its history.

An easy way to maximize the upside potential owning biotech stocks is buying the leveraged ETF through ProShares Ultra Nasdaq Biotechnology Fund (BIB).

BIB uses 2 times leverage which means that for every 1% move up or down in the biotechnology index, BIB should return 2%.

With the strengthen in the biotech sector and a likely continues uptrend it makes sense to use a leveraged fund to amplify our potential gains.

How are you taking advantage of biotech companies?

Divider provided by barge

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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