Barron's concurs: "Familiar Formula: Could the biotechs become the market's next dot.coms?
By Michael Shaoul
Several times in recent weeks, biotechnology shares have remained strong
despite sustained selling throughout the rest of the tech sector. In fact, biotech
apparently is being viewed as a haven by some investors seeking holdings
capable of delivering high returns without excessive risk. The situation is
intriguing ... and worrisome. Certainly, significant strides have been made in
recent months in drug discovery, bio-informatics and genomics. But while this
sector has unique qualities that may enable it to diverge from the rest of the
market in the short run, it doesn't operate in total isolation over the longer
term. Since mid-1999, the biotechs have generated impressive gains and,
even in the face of the market's recent volatility, a number of them remain at
or near all-time highs, while many of their brethren in other areas of the tech
universe have been battered.
Behind this might be a broader
phenomenon: investors' inability to
place concrete value on the future
returns of new and little-understood
technologies.
This isn't confined to biotechnology.
Indeed, to a great extent, the most
recent stage of the bull market grew
out of the investing public's failure to
grasp immediately the huge potential
value of many technologies. This
produced opportunities for those brave or wise enough to buy tech stocks
cheaply; they later enjoyed the eye-popping returns that made the rest of us
envious and eager to join in the fun.
Soon, the technologies themselves
(the Internet, broadband,
telecommunication equipment and so
on) became much better appreciated.
Indeed, investors' indifference was
replaced by wild optimism, pushing
up prices to surprising heights.
Arguably, however, even as they
plunged into the stocks, investors
became no better at understanding
the value of these technologies.
Accordingly the valuations accorded
to many dot.coms, telecoms and other tech issues exploded to levels that in
retrospect seem unrealistic and that have now unraveled.
Similarly, because biotechnology is especially
complex, most investors long ignored it. But once
they turned their attention to this group, it took off rapidly, fueled by biotech's
inherent and invaluable promises, such as producing a cure for cancer and
mapping the code of life. Undeniably, there have been remarkable discoveries
in recent months. Nevertheless, the economic value being placed on the
companies at the center of these achievements isn't founded in reality.
Worse yet, the group is being
overvalued on a fundamental basis at
a time when its prospects, as viewed
through the lens of technical analysis,
is weakening. The Amex
Biotechnology Index recently broke
through but failed to hold above the
high it reached last March. Its recent
price of 722 is almost twice the low
of 379 made last April. Although the
index may seem robust, it's suffered a
troubling reduction in breadth: Over
the past three months, 10 of the
BTK's 17 components either were up by only a negligible amount or fell,
while its three highflyers -- Protein Design Labs, Vertex Pharmaceuticals and
IDEC Pharmaceuticals -- all jumped by over 50%.
Furthermore, two of the group's stalwarts -- Biogen and Immunex -- are
giving off alarming technical signals. Biogen is more than 50% below its high
and recently hit a year-to-date low, breaking through a support level.
Immunex is also down significantly from its high above 83 and looks likely to
test its trend support in the mid-30s.
Both companies have established
products. But their stocks have been
hurt as biotech investors shift out of
older names and into new ones with
either non-existent or negligible
earnings, but with promise perceived
as enormous by the public. Sound
familiar? It's precisely such
circumstances that signaled the
Internet mania and the subsequent
downturn in the broad tech-stock
sector.
In sum, the biotech highflyers are dangerously exposed in a market that has
seen significant selloffs in sector after sector. For this reason, our firm recently
has reversed its previously bullish advice to clients that invest in this sector.
Smart investment is always a matter of matching risks to potential rewards.
So, riding the biotech darlings further could be dangerous. Sometimes, it's
necessary to leave money on the table in order to keep some in your pocket.
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