A big move is coming for biotech and pharmaceutical stocks.
After falling more than 20% over the past six months, an important indicator just flashed.
This indicates the industry is now too cheap to ignore.
It’s only a matter of time until the market comes around and bids it higher.
THIS INDICATOR HAS BEEN EXTREMELY BULLISH
There has been a surge in stocks valued less than the cash on their balance sheet.
Outside of the March 2020 sell-off, there hasn’t been this many biotech and pharma stocks trading below their cash value in the past 10 years.
During that time frame, just under 10% of the industry has traded below cash value on average.
Today, that number is above 14%.
It may not seem like a big difference, but it is. It equates to an additional 71 stocks.
To understand why this is important, you need to know why it happened in the first place.
Since many biotech and pharma companies are pre-revenue and are still developing drugs, a discount to cash is normal for some companies.
Not every company’s research and development pay off in the end. So the market prices in a chance of failure.
But when the “number of stocks below cash” indicator is this high, it signals that the market sentiment is overly bearish.
This should have traders excited, because when this has happened before it has actually been extremely bullish.
When the indicator sits above 12%, the industry usually has a strong next three months.
Between 2018 and 2020, the indicator surpassed 12% nine times.
The industry finished the next three months higher 78% of the time, with a 13% average gain.
When Biotech and Pharma Companies Trade 12% Below Cash
I don’t expect this time to be any different.
ADD EXPOSURE TO BIOTECH AND PHARMA STOCKS NOW
There hasn’t been a specific event or trend that would hinder biotech and pharma companies’ progress.
So I’d take advantage of the bearish sentiment and add some exposure to drug stocks before the market turns around.
Over the next few quarters, there are several catalysts I’m watching that could send biotech and pharma stocks higher.
Originally published on BanyanHill.com
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