Massive swings experienced by the biotech sector since September has proved once again that these stocks aren’t for the faint-hearted investor. Unfavorable political comments and concerns about accounting practices have led to a sharp decline for biotech companies.

At the same time, growth prospects for the sector remain strong. This is because of the sector’s strong fundamentals and the fact that investors may have overestimated the impact of recent events. This is why adding such stocks to your portfolio could be a good choice.

Earnings, M&A Activity Provide Boost 

Encouraging earnings results from several companies such as UnitedHealth Group Inc. (UNH - Analyst Report) and Amgen Inc. (AMGN - Analyst Report) helped the health care sector to stage a rebound in October. This trend will likely continue with several companies projecting higher earnings for the full year.

Meanwhile, even though merger and acquisition activity may have cooled slightly, news of Shire plc (SHPG - Analyst Report) acquiring Dyax Corp. (DYAX - Snapshot Report) pushed stocks higher last Monday. Shire said it intends to take over Dyax in an all-cash deal valued at $5.9 billion. While shares of Dyax soared 28.4%, the Health Care Select Sector SPDR ETF (XLV) gained 2.1%.

Regulatory Fallout Overestimated

Concerns about accounting standards are probably worth considering when looking at the sector’s downside. But the effect of comments from Hillary Clinton and other prominent politicians has probably been overestimated.

While these adverse statements led to a steep slide in the share prices of biotech stocks, this is mostly political grandstanding and will continue until the run-up to the Presidential elections. It will take quite some time before it translates into actual regulatory action and procedural changes.

Long-Term Prospects Bright

While valuation concerns such as those expressed by the Fed Chair are possibly more significant, the sector has faced such challenges before and still performed creditably. The sector has outperformed the S&P 500, last year as well as in 2013, returning 42% against 11% and 74% versus 30%.

There are several other challenges facing the sector, such as heightened competition from biosimilars. However, strong fundamentals and high pipeline productivity continue to bolster its long-term prospects. Meanwhile, despite pricing worries, companies producing treatments for rare diseases remain attractive.

Our Choices

Valuations are traditionally dependent on earnings potential and past performance. However, in the case of biotech stocks, market watchers and investors base their valuations on the highest possible sales major products could rake in. This leads to wild price swings for the stocks.  

However, a variety of factors indicate that the growth potential for the sector remains undiminished. This is why you should buy some of these stocks for growth. Our selection is also backed by a good Zacks Growth Score and Zacks Rank.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space.

Gilead Sciences Inc. (GILD - Analyst Report) focuses on the discovery, development and commercialization of drugs for several indications.

Gilead Sciences holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘B’. The company has expected earnings growth of 51% for the current year.

Retrophin, Inc. (RTRX - Snapshot Report) develops, acquires and commercializes drugs utilized to treat rare diseases.

Retrophin holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘B’. The company’s expected earnings growth for the current year is more than 100%. The earnings estimate for the current year has also increased by more than 100% over the last 30 days.  

Exelixis, Inc. (EXEL - Snapshot Report) develops small molecule therapies used to treat cancer.

Apart from a Zacks Rank #2 (Buy), Exelixis has a Growth Style Score of ‘B’. The company has expected earnings growth of 40.3% for the current year.

Actelion Ltd. (ALIOF - Snapshot Report) focusses on discovering, developing and selling small molecule drugs.

Apart from a Zacks Rank #1 (Strong Buy), Actelion has a Growth Style Score of ‘A’. The company has expected earnings growth of 8.2% for the current year. The earnings estimate for the current year has increased by 5.7% over the last 30 days.  

Enzo Biochem Inc. (ENZ - Snapshot Report) develops, manufactures and markets health care products based on molecular biology and genetic engineering techniques, and also provides diagnostic services to the medical community.

Apart from a Zacks Rank #2 (Buy), Enzo Biochem has a Growth Style Score of ‘A’. The company has expected earnings growth of 33.3% for the current year. The earnings estimate for the current year has increased by 28.6% over the last 30 days.