Biotech slump is buying opportunity

Biotechnology stocks are in a bear market. The Nasdaq Biotech index (NBI) has plunged by more than 20% since its record high in February.

In April, of the index's 121 stocks, only half a dozen or so "have managed to hold their heads above water", say Rodrigo Campos and Caroline Valetkevitch on Reuters.com. It's part of a wider trend.

"Investors are dumping what did well last year, and buying the stuff that did badly," notes the FT's James Mackintosh. Old' technology stocks, classic pharmaceuticals and emerging market shares are starting to come back into fashion in what "looks very much like a bout of profit-taking".

This does not mean biotech is doomed. The slump in stock prices actually helps the industry over the long term, says Steven Syre in The Boston Globe.

"A biotech stock collapse from even greater heights could have shut off public funding to promising new companies and for a long time limited the ability of established biotechs to grow."

The price/earnings growth (PEG) ratio suggests that biotech shares are even starting to look decent value. Generally, stocks with a PEG of below one are seen as being cheap.

More than 20 Nasdaq biotech components, including Biogen Idec (BIIB) and Gilead Sciences (GILD), now trade on PEG ratios of below one.

If you're interested in buying into the sector, The International Biotech Trust (LSE: IBT), which counts Biogen and Gilead as its top stock picks, trades on a 20% discount to its net asset value. The Biotech Growth Trust (LSE: BIOG) is on a discount of 6.7%.