Although this sector is typically discussed as a growth area, the fact that the viability of the sector from a business standpoint and the performance of the underlying stocks is relatively less sensitive to immediate economic activity, in comparison to the bulk of the S&P 500, also warrants considering it as defensive growth opportunities.
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It's been pretty pathetic.
Having said that, as I discussed earlier this week, the performance of all of the stocks that may be considered defensive, including biotechnology, has now been bid up to prices that are beyond even super-cyclical economic projections. Speculators in these areas need to be aware that the risk of a cyclical drawdown has grown substantially and may occur as a result of an increase in aggregate economic activity.
As a matter of fact, due to the relative underperformance of economically sensitive stocks over the past few years, if evidence of a rebound in economic activity increases, the prospect for profit-taking by those having invested in the biotechnology space as preferential to the more economically sensitive sectors may take profits and reallocate capital to consumer discretionary stocks. The premise is that their associated businesses may be expected to benefit from an increase in consumption.
This is unlikely to occur, but if it does, a cyclical peak-to-trough drawdown of 50% or more in the biotechnology space is reasonable. But the long-term prospects for the businesses and their stocks are still stellar and, in my opinion, continue to be better than any other sector.
The reason I bring this up is that many speculators claim an understanding of the probability of that occurrence and an ability to hold through the process as it occurs. But my experience has been that many claiming to be comfortable with a drawdown of this magnitude discover that when it actually happens they're not as comfortable as they thought.
The stocks in this space may generally be divided into two categories; the 10 largest and the rest.