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The two big bullish catalysts for biotech stocks

The SPDR S&P Biotech ETF (XBI) has surged 49 percent in 2017 to its highest level in more than two years, but some say the move isn’t over just yet.

Erin Gibbs, a portfolio manager with S&P Global, points out that “the average stock in the XBI is trading at 21 percent below its [average] analyst target price. The average stock is rated a buy.”

Meanwhile, biotech valuations “are just starting to recover,” she wrote to CNBC on Friday, while the forward price-earnings ratio for the S&P 500 as a whole “has remained at the top of a 3 year range.”

In other words, biotech valuations may have more upside than broad-market valuations.

Of course, valuations are low for a reason. Gibbs also pointed out that “biotech is expected to have earnings contract -3.3 percent in 2017 and then recover to 6.6 percent [earnings per share] growth in 2018.”

“Not exactly stellar growth, and well below the broader market. But at least the stocks are relatively cheaper even with the recent appreciation,” she added.

All in all, Gibbs says that thanks to low valuations and high price targets, biotech stocks have “room to appreciate further,” even if they are not “a strong buy.”

BK Asset Management’s Boris Schlossberg, however, is quite cautious on the space in the short term.

“At this point, some pause is kind of due,” he said Friday on CNBC’s “Trading Nation.” The XBI chart is “coming up against a very long-term resistance” at the ETF’s mid-2015 intraday high of $91.11, Schlossberg said.

On Friday, the XBI slipped slightly to close at $88.32.

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