Investors hate uncertainty.
If the future of a business or industry is in question, stocks suffer.
That's certainly the case with the biotech sector right now.
In 2019, biotech stocks have been pummeled. The Nasdaq Biotech Index is down almost 12% over the last six months.
What's holding back the group?
Uncertainty about drug prices is a huge overhang for biotech stocks.
It's difficult for a company to get a favorable return for investing in drug research if it can't charge what it sees fit for its product.
High drug prices have the attention of both Republicans and Democrats. It's one of the few issues they agree on.
But the solutions to the problem are still unknown.
That uncertainty has biotech stocks in the red this year.
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Perhaps that explains why drug stocks jumped in mid-September when Speaker of the House Nancy Pelosi announced a proposal for fining companies that charge exorbitant drug prices.
Biotech stocks jumped, probably because the proposal wasn't as drastic as many investors expected. While not ideal, there are far worse outcomes in terms of regulating drug prices.
When uncertainty is removed, investors can then focus on fundamentals.
That's when the Money Morning Stock VQScore™ system shines.
Now that we've hit Q4, there are several highly rated VQScore biotech stocks that are poised to rebound now that the fog of uncertainty is removed.
Here are my three favorites...
The Best Biotech Stocks to Buy for Q4 2019, No. 3
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This year has been a complete and utter disaster for Vanda Pharmaceuticals Inc. (NASDAQ: VNDA).
In addition to being in the crosshairs of the drug price debate, Vanda is a small-cap stock. Small-cap stocks have lagged the rest of the market in a big way in 2019.
With Vanda shares down over 50%, there's only one direction to go: up.
Vanda specializes in treatments for rare disorders, including sleep/wake disorder. The company has a number of drugs already on the market generating revenue and profits.
Analysts expect the company to make $0.34 per share in the current year. That's expected to grow 59% in 2020 to $0.54.
At current prices, shares trade for 39 times current-year earnings.
With multiple trials in progress, the future for Vanda is bright, especially with uncertainty removed.
The Best Biotech Stocks to Buy for Q4 2019, No. 2
Buying a big biotech stock ensures diversification. A large pipeline of potential drugs improves the odds of hitting a home run. Of course, not every drug will be a moneymaker.
With a market cap of almost $2 billion, Ligand Pharmaceuticals Inc. (NASDAQ: LGND) has a deep bench of potential moneymakers.
Uncertainty regarding drug prices resulted in Ligand losing 34% of its market value this year.
Those losses make the stock cheap. So much so that management recently announced a $500 million stock buyback program.
At current prices, the buybacks could remove some 25% of the outstanding shares trading.
Less supply will ultimately result in buyers bidding up the stock.
Analysts expect Ligand to grow profits by 17% next year.
With drug price regulation less of an issue, Ligand is a stock to own in Q4.
The Best Biotech Stocks to Buy for Q4 2019, No. 1
Rising oceans and whacky weather are not the only consequences of global warming. Pollution makes it hard to breathe.
That's particularly bad for people suffering from asthma.
That bodes well for Innoviva Inc. (NASDAQ: INVA) and its treatments for obstructive pulmonary disease.
So how do we explain a 44% drop in share price in 2019?
The only explanation is drug price uncertainty.
Unlike the first two selections here, Innoviva will make less money in 2020 than it will in the current year.
That puts added pressure on the stock, but it's also shortsighted.
Innoviva is a high-risk, high-reward growth stock.
So why do shares trade for only seven times current-year estimated earnings?
That's a valuation reserved for value stocks.
With drug price certainty, investors can instead focus on the future for Innoviva.
Its partnership with GlaxoSmithKline Plc. (NYSE: GSK) is key, and investors can expect Glaxo to maximize revenue with Innoviva.
If so, growth will return down the road, and shares could double in value or more.
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