Trading Nation

The case for buying biotech stocks ahead of the election

Trading Nation: Biotech ETF surges

With Hillary Clinton leading in polls ahead of Election Day, investors might expect biotech stocks to trend lower, but the iShares Nasdaq Biotech ETF (IBB) rallied nearly 4 percent Monday.

Some experts see upside in the beaten-up biotech space regardless of who wins the election Tuesday.

An NBC News/Survey Monkey poll released Monday morning found Clinton 6 points ahead of Donald Trump.

"If Trump wins and both bodies of Congress remain Republican, single name healthcare/biotech stocks have the most upside. Even if Clinton wins, there is an upside for the sector if Republicans keep the Senate," Neil Azous of Rareview Macro wrote in a note published Monday morning.

The IBB is down about 24 percent this year, having fallen following calls by Clinton and Sen. Bernie Sanders on the need to more stringently address increases in drug prices.

And this year is on pace to be the first year the health-care sector underperforms the S&P 500 after five years of outperformance, according to a note published Monday by S&P Global, although analyst Lindsey Bell cites this as a contrarian indicator for the sector, signaling a positive outlook.

"While that is not normally a reason to get excited about the sector, it has led to significantly reduced valuation levels for health care stocks. Typically the health care sector trades at a slight premium to the S&P 500, but the current valuation is at a 19% discount to its historical relative valuation," Bell wrote in a note.

"The long-term fundamentals of the health care sector, primarily driven by the country's underlying demographics, make the sector attractive at these valuation levels," Bell wrote, maintaining a positive forecast on the long-term potential in health care.

Should Trump win on Tuesday, the biotech sector would rally, according to Larry McDonald, head of global macro strategy of ACG Analytics and editor of the Bear Traps Report investment newsletter. However, if Clinton were to win, and Democrats gain control of the Senate, "that's a big problem for the IBB," McDonald told CNBC on Monday.

"If the GOP keeps the U.S. Senate (our call), IBB is a winner in our view. As Trump election odds surge, we believe this will help as well," McDonald wrote, adding that if Clinton wins, and if Republicans maintain control of the Senate, biotech could experience a "profitable" relief rally.

The Democrats have a 45.7 percent chance of winning control of the Senate, according to FiveThirtyEight's "polls-plus forecast."