One of the things the last 3 years has taught, is that many companies are not run for the benefit of common shareholders. They are run for the benefit of employees (a hidden communist ethic), or SugarDaddies (BigPharm; venture capitalists who have priviledged status). The implication is, many companies will be successful, while their current common stockholders will do poorly.
The way to tell who these companies are, is to look at the risk of future dilution and/or de facto expropriation of existing shareholders. Companies can do this dilution in various ways; some methods hidden, some illegal, some not.
Silicon-tech seems to mainly use stock options, and using their stock (rather than cash), to buy employees/pipeline/market-share/etc.
Bio-tech, being a less mature industry than silicon-tech, will naturally (and justifiably) have to use dilution to fund their capital needs. But we need to understand that the moral climate of the 1990s was extremely lax. It became commonly accepted corporate practice, to lie to, and cheat, the shareholders. Biotech, being the WildFrontier of investing, is more prone to this ethics-not, than other industries. This has just begun to be corrected; the pendulum of permissiveness has swung perhaps 1/3 of the way back to equilibrium, and then of course will need to continue its momentum past (perhaps way past) equilibrium, in the other direction.
The implications for biotech valuations, for the next several years, is that investor's trust will continue to erode, valuations will continue to decline (at best, move horizontally within a broad band), and access to capital will decline. The easy (way, way too easy) availability of capital for biotech, must be balanced by an equal and opposite period when capital is not available, and investors are extremely wary of holding biotech assets. This will present an opportunity for LT investors with cast-iron stomachs, to buy biotech assets when the love/hate pendulum has swung as far towards "hate" as it was toward "love" in early 2000.
I'll make a prediction: ST trading (sell the rallies; buy the dips, but only the big ones) will outperform BuyAndHold, for biotechs in 2003. There will be a time when BuyAndHold works again, but we are at least a year away from that point. |
