As investors scramble to insulate their portfolios from the chaotic global economy, inflation, and a falling market, biotech stocks might seem a safe harbor. After all, these companies don't need to procure much in the way of raw materials to operate, and the medicines they develop are priced to get a healthy margin and recoup the costs of development, both of which make inflation and other macroeconomic issues less concerning.

But with the SPDR S&P Biotech ETF (XBI -0.78%) down by more than 28% year to date -- even worse than the broader market's losses of nearly 19% -- the current, widespread pessimism toward biotech stocks is undeniable. And it could be a whale of a buying opportunity for enterprising investors looking for a bargain with the potential for lots of long-term appreciation.

Let's examine why biotechs are underperforming and determine whether there's a path to recovery. 

Risky stocks aren't in vogue for a reason

Perhaps the biggest problem with biotech is that risk-on stocks, and growth stocks more generally, are unpopular at the moment for a closely interrelated set of reasons. One cause is higher-than-desired inflation, and the Federal Reserve's ongoing campaign to control it by hiking interest rates.That means it becomes more expensive to borrow money, and so fledgling biotechs without any products on the market will have a harder time raising the capital they need to fund their research and development (R&D) programs from conception to commercialization. 

And that isn't an idle concern. Many projects projects in biotech fail, so returns on R&D investments are quite variable. In fact, only 13.8% of clinical-stage programs make it from phase 1 trials to being commercialized and sold. So biotechs face intense attrition of their pipeline projects by default, which habitually destroys their stock prices and also requires a significant amount of cash to fund new projects. But all of that is business as usual. The only new complication, aside from higher inflation, is the bear market itself. 

Bear markets typically drive investors to companies that are profitable, diversified, and growing somewhat conservatively, ideally with a long history of success. All of those traits are the opposite of biotechs, many of which don't even have any revenue. There's no telling exactly when the bear market will end, but it will end eventually, as they always do. And if you can load up on shares of the right biotechs now, when sentiment is overwhelmingly negative, you'll benefit significantly when the bear market eventually gives way to more normal conditions.

Screening for attractive buys

Assuming that you're interested in taking advantage of the industry's low valuations in preparation for an eventual recovery, now is the time to be looking for potential purchases. And there are two noteworthy qualities to focus on: catalysts and valuations. Let's analyze Intellia Therapeutics (NTLA 1.17%) with both approaches as an example. Its shares are down by nearly 50% this year so far, so it might be an attractive buy.

Catalysts like regulatory approvals, regulatory filings, special regulatory designations, interim clinical trial data readouts, and final clinical trial data publications all have the potential to be strongly favorable for biotechs. By  mapping out a company's catalysts, you can see which companies have a lot of exposure to these events in the next year or so. This, in turn, suggests that there's the potential for big moves in its share price.

Intellia will be presenting early-stage interim data from a pair of trials and making a major regulatory filing in the form of an Investigational New Drug (IND) submission between now and the end of 2023. Such events might drive its stock higher.

Now, what about its valuation? Using metrics like the price-to-sales (P/S) and price-to-earnings (P/E) ratios won't work, as Intellia and many other biotechs don't have recurring revenue or earnings. Instead, try using the price-to-book (P/B) ratio, which is grounded in the tangible assets (like cash) that a company has on hand.

Intellia's P/B multiple is around 5, which is much lower than the biotech industry's average of around 10. Thus, Intellia looks attractive in terms of its upcoming catalysts, as well as its valuation, so it might be primed for a better-than-average recovery over the next couple of years. But Intellia is just one example of a biotech that could be ripe for buying during this dip.

Look around for other biopharmas, and you might find an even better deal -- just don't hold your breath for biotechs as a group to recover until there's a sea change in the market, which might take a while.