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Biotech is beating health care by double this year—here's how one investor would play it

VIDEO4:1704:17
Biotech is beating health care by double in 2019—how one investor would play it

Biotech is breaking out.

The SPDR S&P Biotech ETF (XBI) climbed to a new 52-week high following a wave of deals in the group.

Among them were Merck's $2.7 billion purchase of cancer drugmaker ArQule, Sanofi's $2.5 billion buyout of Synthorx, a company specializing in cancer and autoimmune disorder therapies, and Roche's freshly extended $4.3 billion takeover offer for gene therapy developer Spark Therapeutics.

Monday's slight gains brought the XBI's year-to-date gains to 32%, more than double the roughly 15% move for the broader Health Care Select Sector SPDR Fund (XLV) and exceeding the 25% rise in the S&P 500.

These deals tell Strategic Wealth Partners chief Mark Tepper that biotech's bigger players are in need of growth, but they also help build the bull case for some of the group's smaller names.

"People are living longer, so there's definitely a need for new, innovative drugs, especially [related to] cancer," Tepper said Monday on CNBC's "Trading Nation." "We prefer biotech companies where there's already a product in the market right now because it gives you better revenue visibility."

While "small-cap biotech companies can ... be hit-or-miss" investments, he added, those that have already gone through the complex approval processes required to bring their products to market are largely a better bet.

"Exact Sciences is one of the top names on our watch list right now," he said. "They specialize in colorectal cancer. So, traditional testing methods cause a lot of patients to either put off or avoid getting tested, and what they've done is they've developed a less invasive, more patient-friendly way to test, and now the FDA's actually approved it for younger people as well, so their market's grown."

Better yet for buyers, shares of Exact Sciences have lost serious steam since midsummer, falling over 28% from their July 30 peak of $123.99, as of Monday's close. The stock ended Monday's trading session down more than 2% at $84.19.

"They're making some acquisitions, they're working to diversify their revenue stream, and the stock's been beaten up," he said. "Valuation's looking much better now at the current price levels. I mean, the stock had a great run, they had a tremendous quarter, but expectations were just super high [and] the thing pulled back. However, the growth story's still intact and I think right now is a good entry point."

Craig Johnson, senior technical research analyst at Piper Jaffray, also finds pockets of strength in biotech.

Even though much of the XBI's gains for the year have been made in the past three months, Johnson said in the same "Trading Nation" interview, he is still seeing "a lot of charts at inflection points ... continuing to put up very good relative strength."

In short, "we don't think it's over," Johnson said. "If you take a look at the chart of the XBI itself, it has just broken out of a consolidation, which we'd call kind of a symmetrical triangle consolidation. From our perspective, at minimum, you're going to go back to the old highs at about [$]100, which doesn't seem like a lot right now, but keep in mind that we've had a very strong move."

"Once you have this kind of breakout, you typically have a surge ahead, then you ... pull back and retest," Johnson said. "I suspect that pullback takes you back to about 85-90, and I would definitely be a buyer of this on pullbacks because I think it's going to be a very solid investment as you move into 2020."

The XBI closed at $94.53 on Monday, up about one-tenth of 1%. The XLV ended the day less than 1% lower at $99.71.

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