InvestorPlace published an article last December about the seven hottest biotech stocks to own in 2023 and beyond. One of the seven was the SPDR S&P Biotech ETF (NYSEARCA:XBI). XBI tracks the performance of the S&P Biotechnology Select Industry Index which represents the biotechnology sub-sector of the S&P Total Market Index. XBI currently has 133 holdings. The index is equal-weighted so that smaller biotech stocks can make it into the portfolio.
The index and exchange-traded fund ETF are rebalanced four times a year. Based on the 133 holdings, each stock begins a new quarter with a weighting of approximately 0.75%, which means Mirati Therapeutics (NASDAQ:MRTX) is having a solid quarter, with a 2.17% weighting.
In 2023, XBI is down 13% year-to-date (YTD), 31 percentage points worse than the S&P 500. Therefore, the best biotech stocks to buy are those with a weight closest to 0.75% as they should be neither hot nor cold heading into 2024. This list covers the top three biotech stocks to buy based on this measurement.
Cerevel Therapeutics (CERE)
As the company’s website states, “[It] combines a deep understanding of the biology and neurocircuitry of the brain with advanced chemistry and central nervous system ( ) receptor pharmacology to discover and develop new therapies.”
These developmental therapies aim to treat diseases including Parkinson’s disease, epilepsy and schizophrenia. Cerevel currently has five clinical-stage therapies in trials, with several pre-clinical possibilities.
Cerevel went public in October 2020 through a combination with Arya Sciences Acquisition Corp II, a special purpose acquisition company (SPAC). Based on its current share price, CERE stock has done well since going public, up approximately 140% in three years.
However, the stock has experienced its fair share of volatility. Its shares have traded above $35 on four occasions since going public while trading below $25 on four occasions. Where it goes next is anyone’s guess. However, in October, it raised nearly $500 million in a secondary offering to bring its cash on the balance sheet to more than $1.2 billion, giving it enough cash to fund its operations through 2026.
Revolution Medicines (RVMD)
Revolution Medicines (NASDAQ:RVMD) stock got hammered in October after reporting test results for an experimental cancer treatment that Needham analyst Ami Fadia described as “at best, in line with expectations.”
The results found that 38% of the patients with lung cancer responded to Revolution Medicines’ RMC-6236 treatment. However, only 20% of pancreatic cancer patients responded, which was well below the forecast.
“We do expect that greater time on treatment at higher doses could result in a higher overall response rate, but we do not see the same potential for improvement as for non-small cell lung cancer,” Investor’s Business Daily reported the analysts comments on Oct. 23.
RVMD shares lost 34% on the news. However, that is not uncommon when poor clinical trial results get reported, and it’s a part of biotech investing that is hard to avoid. Through the first nine months of 2023, Revolution Medicines’ operating loss was $307.2 million, 56% higher than a year earlier.
Despite these setbacks, seven of the eight analysts covering the stock give it a Buy rating with a $33.63 target price, a 57% increase over where it’s currently trading.
Of the three biotech stocks on this list, Vericel (NASDAQ:VCEL) has had the best year in the markets, up more than 60% year-over-year (YOY), despite losing ground in the most recent quarter.
The company specializes in advanced therapies for severe burns and sports medicine. It has products nearing or at commercialization, including NexoBrid, its treatment for severe thermal burns.
In Q3 2023, revenue was $45.6 million, up 19.1% from $38.3 million a year earlier. Its nine-month revenue was $132.5 million, up 19.3% from a year ago. More importantly, it expects to generate gross margins near 70% in 2023 with an adjusted EBITDA margin in the mid-teens. Six analysts cover its stock and five rate it a Buy, with a $42 target price. Vericel is great a biotech stock to buy for do-it-yourself investors considering this area of the market.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.