J.D. and others,
I think we all agree that biotech fundamentals are sound and improving. A nasal flu vaccine, the first non-toxic but still effective treatments for psoriasis, any number of cancer advances and inhaled insulin are just a few of the high-profile advances that we should see by the end of next year.
Further, the first tier biotechs all met earnings estimates and should continue healthy over at least that same time period. (With perhaps a little concern about DNA). Most companies are very cash rich and are quite insulated from the economic slowdown - indeed, if anything they might benefit from it as competition for high-tech jobs slows.
On the down side, there might well develop some increasing impatience with the most "dot.com" like of the biotechs - companies such as CRA without a clear business plan and no easy metric to measure how they are doing. The very weakest companies might also have some problems, as the capital markets are likely to stay closed to them.
So much for the fundamental side. On the stock price side, things are of course much less predictable. Biotechs are still firmly linked to the "old economy/new economy" dichotomy - basically we go up and down relative to the drug stocks in synch with NASD going up and down relative to the DOW. If (as I suspect) NASD is going to continue weak, we will be dragged down some irrespective of biotech fundamentals.
So how to defend against this? I really don't see many biotech stocks as being fundamentally overpriced, so I don't see shorting individual biotechs as the answer. What I have done is to maintain some offsetting broad short positions against my biotech holdings. Thus I am short QQQ (but long its biggest component, MSFT), short TTH, and I also have a moderately substantial BBH short that I established last year for tax reasons that I have maintained. I also intermittently sell at-the-money calls against the BTK index. I also moved some money into Treasuries, albeit with exquisitely bad timing.
Bottom line is I am maintaining a net long (almost exclusively in biotechs) but fairly conservative posture here. I am definitely keeping some powder dry in case we get another "buying opportunity."
Peter |
