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In biotech, 2020 could be a year for stock pickers.

Thats the case made in a note Thursday morning from Wedbush that previews 2020 in the biotechnology sector. As other analysts have also argued in recent weeks, the fundamentals of the sector look strong. Biotech surged in the third quarter, approvals from the Food & Drug Administration are coming through above the average annual rate, the valuation of large-cap biotechs are attractive, and there have been significant mergers and acquisitions in past years.

Still, there are question marks. As Wedbush analyst Laura Chico wrote, the Nasdaq Biotechnology Index (ticker: NBI) has a mean annual return of 5% in election years since 2000, versus 12% in non-election years. That is a small sample, to be sure, but the election will bring a number of worries for biotech investors, including policy proposals over drug pricing.

Chico argued that the setup means there is opportunity for careful investors. Should 2020 prove a more challenging year, we think this creates a stock-picking opportunity.

Wedbush analysts highlighted a handful of their top picks, including Myokardia (ticker: MYOK), Applied Genetic Technologies (AGTC) and Albireo Pharma (ALBO).

David Nierengarten highlighted Myokardia, which he rates Outperform with a $90 price target. The stock closed Wednesday at $67.83. The companys lead asset, mavacamten, is in Phase 3 trial in patients with obstructive hypertrophic cardiomyopathy, data from which is expected in the second quarter. With a positive Phase 3 readoutwe would expect a potentially lucrative commercial partnership for mava or a MYOK acquisition, Nierengarten wrote.

Nierengarten also highlighted Applied Genetic Technologies, a gene therapy company working on therapies for rare eye diseases, which he rates Outperform with a $12 price target.The stock closed at $2.75 on Wednesday. The company is expected to release key data in January. We believe that current share levels are at a marked discount to the value of AGTCs [X-linked retinitis pigmentosa] program alone (even when significantly discounted for risk) and offer an attractive entry point ahead of Januarys updated data release, Nierengarten wrote.

Liana Moussatos flagged Albiero Pharma, which she rates Outperform with a $69 price target, and which closed Wednesday at $20.83. Albiero is working on bile acid modulating drugs, and is expected to release key data in the middle of next year. We recommend shares of ALBO ahead of multiple inflection points in 2020, Moussatos wrote.

Biotech stocks are keeping pace with the broader market as the year closes after a slow first three quarters of 2019. The iShares NASDAQ Biotechnology ETF (KBB) is up 25% this year, while the S&P 500 is up 27.3%. Much of that gain has come in the final quarter of the year. The iShares NASDAQ Biotechnology ETF was up 21.2% in the third quarter, while the S&P 500 has climbed just 7.2%.

The iShares Nasdaq Biotechnology ETF closed Wednesday at $120.56, just off its 52-week high of $122. The ETF was flat in premarket trading on Thursday.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com

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Biotech Stocks Are In a Position to Break Out in 2020, Analysts Say - Barron's