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 (XHB) gained close to 45 percent, while the Market Vectors ETF Biotechnology (BBH) gained close to 50 percent -- three times more than the S&P500 (SPY). In homebuilding, Standard Pacific (SPF) and Lennar (LEN) are among the best in the bunch, with a 180 and 120 percent gain, respectively. In biotechnology, Medivation (MDVN) and Affymax (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 (TOL), Lennar, MDC Holdings (MDC) and DR Horton (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 (ONXX), VIVUS Inc. (VVUS) and Affymax, Inc. to mention but a few.
- Second, a wave of M&A at considerable premiums, e.g., Valeant Pharma's (VRX) acquisition of Medicis (MRX) for $2.6 billion (a 39 percent premium from the previous closing), Spectrum Pharmaceuticals' (SPPI) purchase of Allos Therapeutics (ALTH) for about $206 million, and Bristol-Myers Squibb's (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.