The S&P 500 had a good summer. The widely followed index rose more than 7% in the third quarter.
It was the best quarterly performance for the S&P 500 since 2013. Profits among S&P 500 companies grew some 25% year over year in the first half of 2018 bolstered by robust domestic economic activity and a big drop in the corporate income tax rate.
Unfortunately, the biotech sector did not participate in the rally of the overall market. As can be seen by the chart of the SPDR S&P Biotech ETF (XBI) , above, this part of the market spent the dog days of summer basically marking time.
I expect the biotech sector to close out 2018 on a high note, however. M&A activity across the industry has been largely dormant since early in the year. But with drug and biotech giants needing to replenish their pipelines and having a huge amount of financial firepower to do so, I expect that to change in the months ahead. In addition, the calendar for major healthcare conferences picks up in the fourth quarter. Both of these factors should help buoy the sector.
Let's discuss a few of the names I expect to do well to close out 2018.
I really like Exelixis (EXEL) . The stock of this mid-cap oncology concern seems to have bottomed of late after a 40% decline from the beginning of 2018. The company is profitable, and the shares are cheap on a forward earnings basis.
Exelixis' main product, Cabometyx, is seeing impressive sales growth and continues to be approved for new indications and markets. I also could easily see Exelixis being a logical acquisition for a larger player that wants to expand its footprint in oncology.
I also like Theravance Biopharma (TBPH) . This stock has started to move in recent weeks and could continue to run up into the expected FDA approval of its compound Revefenacin for the treatment of chronic obstructive pulmonary disease that should come in mid-November.
Revefenacin is one of several compounds in Theravance's pipeline. The drug was developed within a collaboration agreement with generic drug giant Mylan N.V. (MYL) . If approved, Theravance is eligible to receive up to $220 million in development and sales milestone payments, as well as a profit-sharing arrangement with Mylan on U.S. sales and double-digit royalties on ex-U.S. sales.
Finally, Syndax Pharmaceuticals (SNDX) appeared to break through upward resistance levels last week with an approximate 13% surge.
Syndax is a small oncology concern and probably the highest risk and highest potential reward of the three names profiled in this column. It has two Phase 3 trial results due in the coming months. One should be out sometime in the fourth quarter and the other in the first half of 2019. Both are potential significant catalysts for the stock -- in either direction.
While highly volatile, I like Synadax's risk/reward profile at current trading levels.
This commentary originally appeared on Real Money Pro on Oct. 1. Click here to learn about this dynamic market information service for active traders.