There's no fever like gold fever... unless you're in a biotech bull market.
Since 1980, the Datastream Biotech Index has enjoyed four separate triple-digit rallies... including a 646% moonshot in the late 1990s and a 421% blast in the mid-1980s. In the early 1990s, the index rose 1,347% in less than four years.
We crunched the numbers on biotech bull markets and found the average gain in a biotech bull market is 565% over 2.6 years.
There's just no other group of stocks that rally like biotechs. As we've said in DailyWealth before, if you catch just one biotech bull market, you'll never have to work again...
The last major biotech bull market topped in 2000, along with technology stocks. They've been dogs since then. On March 6, 2000, the NASDAQ Biotech Index was around 1,600. Today, it's around 800 – still down 50% from its peak more than nine years ago.
Meanwhile, biotech companies' earnings and revenues have grown, and biotech stocks have started to resemble value investments. But that's about to change.
Obama wants to nationalize health care. According to a recent story by CNN, the Big Pharma industry is frightened his plans will cause a massive drop in the prices of medical supplies, drugs, and equipment as the government sucks private demand from the industry. It's responding to this challenge by throwing money at the biotech sector. Instead of spending years developing their own drugs, they figure it's easier to spend their billion-dollar cash hoards snapping up cheap biotech companies with promising drugs.
Last week Bristol-Myers Squibb made an offer on Medarex, a cancer treatment biotech. Bristol offered $2.1 billion... a 90% premium to Medarex's stock price before the announcement.
In May, Johnson & Johnson bought Cougar Biotechnology, another cancer drug developer, and an 18% stake in Elan, an Irish biotech. Then there were the two massive deals last year with Roche buying Genentech and Eli Lily buying ImClone Systems.
And why not? Big pharma companies have billions in cash and almost zero net debt. Take Pfizer for example. It has $34 billion in cash and $29 billion in debt. Or Johnson & Johnson. It has $14 billion in cash and $14 billion in debt. Or Merck. It has $13 billion in cash and $7 million in debt.
With so much cash and more room to take on leverage, the Big Pharma industry has a trillion dollars in buying power. Yet the biotech sector is tiny.
In the entire biotech sector, there are only five biotechs with market caps over $10 billion... and only 21 with market caps over $1 billion. It'll be like filling up teacups with a water cannon.
And this week, biotech stocks made a stunning breakout. I monitor two biotech funds, PowerShares Dynamic Biotech & Genome (NYSE: PBE, Stock Forum) and the SPDR S&P Biotech Index (NYSE: XBI, Stock Forum).
PBE is up 24% in two weeks and XBI is up 16%.
These two biotech funds are giant baskets of the market's biggest biotech stocks... companies like $62 billion Amgen, $14 billion Biogen, and $14 billion Genzyme. The action in the microcap biotech sector was even more dramatic. A dozen smaller biotech stocks have jumped 50% or higher in the last two weeks... and many more are breaking out to new highs.
It took billions of dollars crashing into the sector like a 20-foot wave against a cliff face to move these stocks so far so fast. My guess is, the big pharmaceutical companies are triggering a merger-and-acquisition frenzy in the biotech world...
To play this trend, consider buying a broad biotech fund... or if you're more aggressive, consider a basket of small-cap biotechs.
Read more Stockhouse articles by Tom Dyson