Time for Caution in Tech and Biotech?
In early December last year we posted that tech and biotech probably warranted some additional emphasis in 2016. Well, tech. as represented by the Technology Select Sector SPDR ETF (XLK,) is off 5% and biotech, as represented by the iShares Nasdaq Biotechnology (IBB,) is off 22% from our post. Bad call or bad timing? The timing was certainly not good in retrospect, however the fundamentals of each group were, and still seem to be, mostly solid long term.
Although earnings season has been mixed for tech, most of the stocks do not appear to be carrying high price to earnings multiples. And, most of the big tech companies are paying reasonable dividends that are generally rising, an important long term investment theme. The industry move to cloud and mobile is still in process and seems to be, along with a struggling global economy, adding to recent volatility.
As well, the largest biotech companies looked to be trading at reasonable valuations in early December. These are the companies that most analysts believe are the future of medicine. Many are hugely profitable enterprises, which may be part of the reason for their current price weakness. They, of course, are under attack in this political season for the high cost of their treatments. This has been exacerbated by headlines around especially egregious practices of two, now infamous, second tier drug companies. There also seems to be increasing price pressure coming from the big distributors of biotech products which bears monitoring.
We will be watching for these two sectors to hold their February and March lows as a sign of price stabilization. Any breach of those lows will probably be a result of a global economy that is sinking and will be a reason for caution. In the case of biotech we feel this pressure for lower prices and the affect on future earnings is an important issue that we will be following closely.