The biotechnology sector, represented by the iShares Biotechnology ETF (NASDAQ: IBB), has experienced a year of consolidation. With the ETF up just 0.8%, it has underperformed the broader market, making it one of the worst-performing sectors year-to-date. However, as the year's second half begins, the IBB is trading just 3% away from its 52-week high and a significant resistance level, suggesting a potential breakout.
Should the sector be on your watchlist for the year's second half? Let's take a closer look.
Technical Analysis: Biotech ETF Nears Resistance
Biotech stocks, represented by the IBB, reached a two-year high in February but have trended sideways despite several mergers and positive clinical news. The consolidation within the sector may be attributed to various factors, including macroeconomic concerns, sector rotation, and a waning interest in biotech stocks after the intense focus during the pandemic.
In 2020, the industry gained significant attention during the pandemic as companies like Pfizer with BioNTech, Moderna, and Johnson & Johnson developed COVID-19 vaccines. However, as society adapted to living with COVID-19 and other economic and political concerns emerged, interest in biotech waned. Despite these headwinds, the underlying fundamentals of the biotech sector remain robust, with continued innovation and a strong pipeline of clinical trials.
Fund flows have been unfavorable year-to-date, with a negative 2.14% flow percentage representing net fund flows of the ETF as a percentage of Assets Under Management (AUM). More recently, the flow percentage for the past month is 2.61%, indicating a potential shift in momentum.
From a technical analysis perspective, the sector ETF is trading near its resistance and above all of its major moving averages. While it has moved sideways for most of the year, it is now making consecutive higher highs, approaching its breakout level. This pattern indicates that investor sentiment might be shifting positively, positioning the sector for potential gains in the year's second half. Assessing the momentum of the ETF's top players can help investors determine which biotech stocks they should invest in.
Amgen's Role in the IBB ETF: Weighting and Impact
Amgen (NASDAQ: AMGN) is the largest holding in the IBB ETF with a 9.26% weighting. Similar to the sector ETF, Amgen is consolidating near its 52-week high, forming a tight wedge pattern and setting up for a potential breakout.
Year-to-date, the stock has outperformed the sector, up almost 8%. Analysts are bullish on the stock, with a Moderate Buy rating based on 21 analyst ratings, though the consensus price target forecasts a nearly 1% downside. The company last reported earnings on May 2, announcing an EPS beat of $3.96, compared to the consensus estimate of $3.76. Amgen's revenue for the quarter was $7.45 billion, up 22% year-over-year.
Evaluating Vertex's Strong Uptrend and Stock Potential
Vertex Pharmaceuticals (NASDAQ: VRTX) is the second-largest holding in the IBB ETF with a 9.16% weighting. VRTX has been a standout performer in the sector year-to-date, boasting a 15.8% return. Unlike Amgen and the broader sector, Vertex has significant upward momentum, trading in a firm uptrend and consolidating just 3% away from its all-time high.
After reporting impressive earnings, the stock broke out of a lengthy consolidation in May. Vertex last issued its quarterly earnings results on May 6, posting an EPS of $4.76, beating the consensus estimate of $3.66 by $1.10. The company had revenue of $2.69 billion for the quarter, compared to analysts' expectations of $2.58 billion, marking a 13.3% year-over-year increase.
Vertex's strong performance can be attributed to its focus on innovative treatments for serious diseases, including cystic fibrosis, which is where it leads the market. The company's robust pipeline and strategic collaborations have also been critical to its success.
Breakout Potential: Biotech Sector's Promising Indicators
The biotechnology sector is beginning to show signs of life, showing potential for a breakout after a lengthy consolidation. The performance of its top holdings, like Amgen and Vertex Pharmaceuticals, will be crucial in determining the sector's direction and ability to break out.
Investors should closely watch these key stocks and the sector's resistance levels to gauge the next move. The recent shift in fund flows and the technical setup suggests that the sector could be poised for a strong performance in the year's second half.