This sector will lead the next bull market…

Every bear market is followed by a bull market...just like spring inevitably comes after every winter. Of course, it's easy to lose sight of this fact in the midst of a brutal bear market, but investors need to realize that incredible opportunities are right around the corner. And, NOW, it's time to start preparing. I expand on those thoughts below and reveal the sector that I believe will provide the highest profits for investors when the bull starts to run again. Read below for more details.

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One of the most reliable ways to find the best opportunities for the next bull market is to focus on sectors that present the best combination of growth , value and catalysts. The use of this strategy in the previous decade would have led investors to focus on SaaS or Internet.

Many of the big names in these sectors gained over 1000% in the previous bull market. Of course, investors will have to find new stocks in new areas to achieve such returns in the next bull market.

Today I want to talk about the biotechnology sector and discuss 3 reasons why every investor should be careful.

#1: Valuation

While many parts of the market have become extremely overvalued, biotechnology is the exception, as the entire sector remained flat between 2015 and 2022.

BUT, only stocks were stable. Earnings really exploded.

The best way to see this is the weighted average P/E of the biotech ETF, IBB, which has fallen from 83 in 2015 to 12.5 today.

From a more qualitative perspective, we can see that the IPO market has dried up, along with inflows from retail and institutional investors. In fact, nearly 25% of small- and mid-cap biotech companies have more cash than their actual market capitalization.

#2: Growth

Usually, investors can only find attractive valuations in boring sectors with limited growth prospects.

Biotechnology is a rare and notable exception.

Populations in developing countries are aging at a rapid rate. There is the famous statistic that Japan sells more adult diapers than baby diapers. Well, that will also be the reality for the United States and Europe in a few decades.

An aging population also means that the demand for new drugs will also increase. There are always new innovations in the space that lead to better diagnostic and treatment outcomes.

Healthcare spending also continues to grow at a faster rate than the overall economy.

This is another trend that won't stop any time soon given that much of it is government subsidized. And, there is no political appetite on either side of the aisle to change this arrangement.

#3: Catalysts

An attractive growth and value backdrop will pique the interest of all investors. But discovering the powerful catalysts at play will turn that interest into an obsession.

The most powerful thing is that we are currently in a slowing growth environment. At the start of the year, inflation was the main threat to the economic outlook.

That has now been replaced by a recession. The best proof of this is that longer-term rates are falling in line with forward-looking inflation indicators.

This is a brutal environment for most stocks, but windfall for biotechs. The bottom and top lines of these companies are disconnected from economic or monetary conditions. As the economic outlook erodes, money will flow from cyclical stocks to sectors more insulated from the economic cycle.

Another catalyst for the sector are the barren pipelines and empty balance sheets of big pharma.

This places a bid in the biotech sector as these companies depend on the biotech sector for innovation that will deliver the next generation of blockbuster drugs.

Finally, the most exciting catalyst is precisely this innovation. Over the past decade, the cost of drug development has come down thanks to computer modeling and a better understanding of diseases and the human body. This translates into better margins and better results.

These technologies also serve as a gateway to a future of personalized medicine. The first step is to improve the diagnosis in terms of accuracy and speed. This is where we are today.

The most exciting part of the biotech space is in the micro and small cap areas, as these are the companies with the most potential. As noted above, many are trading at lower valuations than cash on their books.

Most investors simply don't have the time or inclination to spend a lot of time...