From where I sit, the biotech sector looks like the most wildly overvalued sector in the entire market, not excluding the dot.coms, even after this week's slump.
What am I missing, if anything?
Not wishing to be left out of the fun, so to speak, I recently started poking around in the biotechs looking for some conventionally recognizable reasonable value. Well, I couldn't find any, except for a very few "solid" and "mature" biotech companies like Amgen and Biogen, as well as some regular old pharmaceutical companies that dabble in biotech. But those are not the companies investors have been gobbling up anyway; they are all down for the year to date.
Most of the high-flying biotechs have no earnings now, and never had any in the past, so valuation is a problem to begin with. When there is no p/e to go on, it is customary to look at the price/sales ratio, on the assumption that rapidly increasing revenues (as reflected in relatively low price/sales ratios) will eventually lead to profitability (unless your company is Amazon.com). Oops! Awfully high price/sales ratios there, in Biotechland.
But the real corker is the price/cashflow ratio! Eeeek! It is negative! We aren't even talking free cashflow; just ordinary, everyday, pre-capital spending cashflow.
On the Wall Street City (Telescan) site, you can check out individual industries for over-valuation or under-valuation. Well, the list of the stocks is not complete (only about 50 on it), but what is striking is that all but four come in at the very top of the over-valuation scale. And here are the average ratios for all the stocks on that list:
P/E: P/e 169.4
Projected P/e: 88
Price/Sales: 190.3 (!!)
Price/Cashflow: -19.9 (eek! again)
My normal reaction would be to conclude that these are all just "story stocks," pure and simple, and that it is bound to be a long way from cup to lip for the majority of them. Maybe what they discover down the road will be even better than the Fountain of Youth, but I personally am an investor, not a venture capitalist.
On the other hand, I am not a professional financial analyst, or a scientist, either. You do suggest that there are "other" ways to value biotech, and this thread is designed to discuss them. I have to confess I have not got the time to go through all of the almost 800 posts here. Can you point me in the "right direction", towards the best posts on the subject? And tell me whether you think I am all wet?<g>
Thanks.
jbe
|
