Homebuilding and biotechnology are two totally different sectors but they have one thing in common: They are among Wall Street's top-performing sectors. For the last 12 months, the SPDR S&P Homebuilders (NYSEARCA:XHB) gained close to 45 percent, while the Market Vectors ETF Biotechnology (NYSEARCA:BBH) gained close to 50 percent -- three times more than the S&P500 (NYSEARCA:SPY). In homebuilding, Standard Pacific (NYSE:SPF) and Lennar (NYSE:LEN) are among the best in the bunch, with a 180 and 120 percent gain, respectively. In biotechnology, Medivation (NASDAQ:MDVN) and Affymax (OTCPK:AFFY) are up 500 and 300 percent, respectively. What is next for the two roaring sectors? Are they still a buy?
According to an article published in Barron's over the weekend, the homebuilder sector has room to grow. We also see five tailwinds to the sector's growth:
- First, improving macroeconomic fundamentals, especially job growth, the most important factor for housing affordability.
- Second, improving microeconomic fundamentals. New home inventories are declining and home prices are stabilizing. Industry leaders like Toll Brothers (NYSE:TOL), Lennar, MDC Holdings (NYSE:MDC) and DR Horton (NYSE:DHI) have been reporting better than expected earnings.
- Third, improving technicals. Trading volume has been picking up across the industry and some charts (e.g., Lennar's and Toll Brothers') look bullish.
- Fourth, large short positions -- Close to 41 percent of Honvanian's shares and 37 percent of Standard Pacific are short.
- Fifth, record low mortgage rates (3.59 percent on a 30-year mortgage).
We also see tailwinds for the biotechnology sector growth:
- First, a wave of FDA approvals for promising new drugs from Medivation, Inc., Onyx Pharmaceuticals (NASDAQ:ONXX), VIVUS Inc. (NASDAQ:VVUS) and Affymax, Inc. to mention but a few.
- Second, a wave of M&A at considerable premiums, e.g., Valeant Pharma's (NYSE:VRX) acquisition of Medicis (MRX) for $2.6 billion (a 39 percent premium from the previous closing), Spectrum Pharmaceuticals' (NASDAQ:SPPI) purchase of Allos Therapeutics (NASDAQ:ALTH) for about $206 million, and Bristol-Myers Squibb's (NYSE:BMY) acquisition of Amylin Pharmaceuticals (AMLN).
- Third, the aging of the baby-boomers that creates a vast market for drugs.
A word of caution: Both sectors are highly speculative, especially the biotechnology sector, where most companies run out of money before they bring a new drug to the market. Hype isn't a substitute for due diligence.
Disclosure: I am long BMY, HOV, LEN, TOL, ITB, OTCPK:AFFY, DHI, SPF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.