- Out of all the most appealing areas of the US stock market, Bank of America Merrill Lynch identifies biotech as the No. 1 option.
- The firm likes biotech’s ideal combination of relatively cheap valuation, high expected growth and considerable upside potential.
Right now, it seems like there’s opportunity in the stock market no matter where you look.
Tech companies are surging to yet another series of record highs following blockbuster earnings reports for many of the sector’s mega-cap titans. Wall Street strategists are getting more bullish on banks as rate hikes loom. And that’s not to mention the stocks set to benefit most from tax reform.
But Bank of America Merrill Lynch sees one industry standing above them all: biotech.
To them, drug developers offer an ideal combination of attractive pricing and upside growth — unlike their tech stock counterparts, which are sitting near the most expensive on record. BAML also likes the upside offered by biotech based on how traders are currently positioned on the sector, especially when compared to the crowded tech trade.
Back in late September, BAML head US equity strategist Savita Subramanian wrote the following about drug developers: “Biotech trades at one of the biggest discounts to history of all industries, suggesting over 40% implied upside if its relative P/E reverted back to its long-term average.”
An update of that analysis shows that biotech now has an implied potential upside of 42%.
Here’s a list of BAML’s best sector opportunities:
Another area of the stock market that BAML highlighted in a recent client note is consumer staples. While the firm still only has the equivalent of a neutral rating on the space, it notes that it’s trading at the most attractive valuation in 6 1/2 years.
“Today, staples now looks cheap versus history,” Subramanian wrote in a client note on Monday. “Coupled with its earnings resiliency during downturns, staples is currently our preferred defensive sector after our overweight healthcare.”