Small cap and biotech are historically cheap right now

Currently, these two sectors look like the best bets for long-term, outsized gains:

Small Caps:

  • S&P 600 (small cap) valuations are at their lowest point since 2008 and the COVID-19 sell-off in 2020.
  • The current valuation gap between the S&P 500 and the S&P 600 is the biggest since the dot-com crash in 2001.
  • A year or so after the dot-com crash, the forward earnings multiples of the S&P 500 and S&P 600 returned to being nearly the same.
  • Historically, small caps recover strongly after downturns, with an average return of 25.9% following a negative years.

Biotech:

  • Biotech companies, often unprofitable and reliant on funding, have struggled in the current rate environment. A potential slowdown in rate hikes could revive the sector.
  • We’re starting to see M&A activity pick back up, particularly big pharma interest in development-stage biotech. Companies like Merck, Bristol Myers Squibb, and AbbVie face looming patent expirations for their biggest drugs and will need to fill in revenue gaps.
  • Short interest in the SPDR S&P Biotech ETF is very elevated, with 56% of the fund’s shares being shorted. A short squeeze could be on the way.

The possibility of a recession is still up in the air, but deeply discounted companies have wider safety buffers. In my view, it's better to consistently dollar cost average into discounted sectors rather than try to time a potential recession and risk missing a recovery.

Thoughts on this? Would love any ideas for quality small-cap/ biotech names.

submitted by /u/MarianneWalsh
[link] [comments] https://www.reddit.com/r/stocks/comments/14w54jv/small_cap_and_biotech_are_historically_cheap/
Created 2y | Jul 10, 2023, 9:21:40 PM


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