As investors await the Federal Reserve rate decision Wednesday afternoon, Goldman Sachs highlighted to clients an overlooked group of stocks poised to benefit from the move. Biotechnology stocks offer an under-the-radar and unappreciated way to profit from the central bank's looming campaign to start cutting the cost of borrowing, according to Goldman Sachs. "For those looking for a high torque play into the first rate cut this Wednesday, buying biotech checks a lot of boxes," wrote John Flood, Goldman's head of Americas equities sales trading, in a recent note.
Biotech is a back door way to play the Fed because the group is highly sensitive to interest rates, owing to its predicted cash flows coming so far out into the future, Goldman said. More fundamentally, however, biotech has benefited lately from improved business and brighter investor sentiment, the investment bank said, citing "positive clinical catalysts/events more recently and the regulatory environment has been more benign than typical of an election year." Lastly, Goldman said the group is still out of favor among hedge funds whose investments are tracked in the investment bank's "prime book," falling to the 13th percentile in the long/short ratio on a 1-year basis and the 4th percentile on a 5-year view, as of Monday.
From a contrarian point of view, such "positioning [is] a potential tailwind for biotech now too," Flood's note said. Regardless of whether or not the Federal Reserve delivers a quarter point or a half point reduction in the fed funds rate on Wednesday, "we are entering a cutting cycle and this should be well received by biotech. Rates play a larger role than growth in driving share prices in biotechnology (the only sector where this is the case)," Goldman told clients.
Shares in many speculative, small capitalization biotech companies have an "option-like structure" that "inherently creates interest rate risk. With little to no profitability today, but expected profitability if trials are successful, biotechnology cash flows are generally long duration," Flood wrote. "For investors who believe that bond yields will decline from here, biotechnology stocks could offer better exposure than other rate-sensitive parts of the equity market, which will be more dependent on the trajectory of economic growth.
" Investors may have already begun to anticipate the effect of lower rates on some biotech companies. Gilead Sciences , the largest holding in the $8-billion iShares Biotechnology ETF , has surged 5.1% in September, through Tuesday, while the biotech ETF, the Nasdaq Biotechnology Index and the S & P 500 Index are all down a fraction this month.
IBB .SPX mountain 2024-06-30 The iShares Biotechnology ETF has risen more than twice as much as the S & P 500 this quarter. In the third quarter, Gilead is ahead more than 21%, IQVIA Holdings , the fifth largest holding in the biotech ETF, has gained 13.
5%, and Regeneron Pharmaceuticals , the ETF's second-largest position, has climbed 9.1%. Amgen Ltd.
, the third-largest holding in the ETF, has increased 6.5%. Vertex Pharmaceuticals , the ETF's fourth-largest holding, has picked up 2.
7%. The iShares Biotech ETF is up 7.7% this quarter while the Nasdaq Biotech Index has advanced 7.
4%, more than double the 3.2% gain in the S & P 500 since June 30. Year-to-date, Regeneron is up 30.
6% and Vertex by 18.3%, both outperforming the 18.1% rise in the S & P 500.
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