The biotech sector is undervalued, John Zechner says

If you’re looking for a market sector that should do well in 2019, then biotechnology should be on your list, says John Zechner, who prefers Celgene (Celgene Stock Quote, Chart NASDAQ:CELG) over Gilead Sciences (Gilead Sciences Stock Quote, Chart NASDAQ:GILD) and likes the Nasdaq Biotechnology ETF for sector-wide coverage.

“I think biotechnology in the US is probably one of the better areas of value and growth right now, probably even better than technology. My favourite play is the IBB, which is basically the biotechnology NASDAQ ETF in the US,” says Zechner, Chairman and Lead Equity Manager at J. Zechner Associates, to BNN Bloomberg.

“You look at the chart and it’s setting up relatively nicely. It had a great run and it has pulled back a long way from the peak. I think that’s just a great growth ETF just to leave in the portfolio over time,” he says.

With a market cap of US$7 billion, IBB had an up-and-down year in 2018, finishing down 10.2 per cent. Like the technology sector, biotech started a downward plunge at the beginning of October.

And while biotech has a reputation for hits and misses, an indexed ETF can help, says Zechner, who points to the risks involved in single-company investing in the space.

“If one trial fails or one of your drugs gets genericized, you’re suddenly at risk,” he says. “Sometimes you don’t know what names are going to be good or bad but you like the entire sector. And for biotech, I like the sector, I think it’s undervalued and under-appreciated to a degree and yet I think there’s still good growth potential.”

At the same time, individual plays can prove profitable, he says, pointing to biopharm company Celgene as one to prefer.

“I think it’s more of a buy here,” he says. “The pipeline for Celgene is far better than at Gilead, where the hepatitis B drug has sort of flooded the market and it’s trading at seven or eight times earnings but you’ve got no growth going forward and they’ve got to reinvest. Celgene has a better growth pipeline at this time and the valuation is low as well.”

Celgene finished down a full 39 per cent for 2018. The company will put out its next quarterly report on January 24, with the Street expecting earnings per share to be up 15.5 per cent year-over-year and revenue to rise 14 per cent year-over-year.