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Biotech Stocks: A Year in Review

Stocks in this article: AMGNTEVAAZNFRXIPONVOMDVNJNJ

NEW YORK ( TheStreet) -- Known for its above-average risk and steel-nerved investors, the biotech sector has piled up year-to-date gains of close to 52% -- one of 2013's best-performing areas of the market. That's even with a slight pullback since the summer.

Let's review the year in biotech.

My first takeaway from 2013 is this industry didn't see many merger and acquisition announcements, at least not relative to the past two years. Amgen (AMGN) completed a $10.4 billion deal for Onyx Pharmaceuticals, a disappointing move that was pretty much it for biotech M&A this year. This was despite the fact that many experts noted how primed Teva Pharmaceuticals (TEVA) was for a takeover.

It's possible most mergers are being postponed for 2014, including the much-rumored deal between AstraZeneca (AZN) and Forest Laboratories (FRX). It's also possible that management of these companies are beginning to alter their prescriptions for growth. We shall see.

This year, 2013, will go down as the year when the biotech sector -- with around 220 new publicly traded companies -- emerged from relative obscurity to raising almost $50 billion in investment capital.

The market hasn't been flooded with this much interest in biotech IPOs since 2004.

Now I'm not going to venture into the so-called "doom-and-gloom" territory. But the Renaissance IPO  (IPO) exchange-traded fund, which tracks several biotech stocks, has posted a roughly 50% gain. I have to ask: What reasonable level of outperformance will there be in 2014? All the stocks can't be winners.

I'm not suggesting these companies are doomed to fail. But I would caution investors about riding the wave of all of this IPO enthusiasm. Many lockup expirations have yet to arrive, so insiders might still flood the market with shares when they are finally allowed to sell. You don't want to be the one caught holding the bag.

Another way to play the demand would be to diversify some capital into, say, Novo Nordisk (NVO), the largest biotech name on the market according to market cap. With gains of (only) 8% on the year, I believe Novo can be a relative outperformer in 2014. While Novo may not be cheap relative to Amgen, you would be hard pressed to find a safer bet from a margin and profitability perspective.

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