Biotech stocks finished out the month on a high note after a roller-coaster ride this year. Yet according to one top analyst, investors must trade the space carefully in 2016.
"It's really a stock picker year," RBC Capital Markets Michael Yee told the "Fast Money" traders last week.
Yee explained in his most recent note that plenty has changed in the biotech industry in 2015. The sector has evolved so rapidly that the public knows more about diseases, targets and designing better-targeted drugs than ever before.
However, while he remains "fundamentally positive" on secular innovation, he said overall outlook and expectations for biotech stocks have shifted. According to Yee, there are four major headwinds in the space that temper his view on stock performance in 2016.
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First, "there's a big money-flow change going on," he said. "After three years of gains of well over 30 percent a year in biotech, most fund managers have been overweight this sector for many years and I think there's a situation here where people are taking that overweight position and moving to a lot more equal weight position."
As investor interest is a crucial part of research and development for many biotech names, the possibility of a slowdown in growth increases in this type of environment.
Secondly, "I think as we're going into an election year I think people are going to be a little more cautious going into the political rhetoric that is going to pick up," Yee said. "I see biopharma stocks having a little bit of a tougher time in a political election year."
Skyrocketing drug prices have been the topic of many political debates and conversations involving Democratic presidential contender Hillary Clinton, Yee notes. Earlier this year, Clinton injected herself into the drug pricing controversy surrounding the medication Daraprim.
Whether the industry experiences pressure to lower prices or not, the general investor is going to shy away from investing in controversial stocks.
Third, Lee said that the technicals are sounding the alarm. "We've broken down on the Nasdaq biotechnology index (NBI) on the 200-, the 100- and the 50-day moving averages — I think it's going to take some time for us to grind back up," Yee said.
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