The SPAC market is signaling big gains are ahead for biotech stocks.
Venture capitalist Chamath Palihapitiya has filed for the creation of four new special-purpose acquisition companies (SPACs), each to be funded with $200 million and targeting a company in the biotech sector.
Palihapitiya, who has participated in 14 SPAC deals in recent years, remained on the sidelines after the SPAC market began cooling off at the end of 2020.
His decision to re-enter the market and specifically target biotech companies suggests the industry may be undervalued and presents the highest return potential.
Great News for Biotech Investors
The four new SPACs will each target a different niche within biotech:
- DNAA: neurology.
- DNAB: oncology.
- DNAC: organ and blood diseases.
- DNAD: immunology.
These will add to the list of 72 health care-focused SPACs looking for a company to merge with, creating an oversupply situation.
Since the number of SPACs greatly outweighs the number of companies ready to go public, higher valuations will have to be paid for mergers.
For biotech investors, this is great news.
As higher prices are paid for private companies, publicly traded counterparts from the same niches should see their valuations rise to a comparable level.
This logic does not only apply to SPAC transactions, but buyouts and initial public offerings (IPOs) as well.
Historically, as the number of biotech buyout and IPO transactions increases, so does the value of biotech stocks.
The new valuation benchmarks could be a short-term catalyst that sparks a long-term rally.
A Superior Risk-to-Reward Ratio
Since fundamental information is less certain with biotech, the industry primarily trades off of sentiment and momentum.
When prices are rising, sentiment improves and buyers enter the market, which has historically created a long-term uptrend.
In recent decades, there has been a series of huge rallies in biotech that offered attractive opportunities for traders.
But even utilizing a buy-and-hold strategy with biotech stocks has shown huge gains.
Since its inception in 1993, the Nasdaq Biotech Index has outperformed the S&P 500 Index by three times.
Biotech offers investors a superior reward-to-risk ratio and should have a place in every portfolio.
That’s why, if you haven’t yet, you should check out Ian King’s New Era Fortunes service.
Ian has several biotech stocks in the New Era Fortunes model portfolio. These companies are developing treatments for COVID-19, cancer and other critical health issues.
You can learn more about Ian’s New Era Fortunes trading strategy by clicking here.
Research Analyst, Strategic Fortunes