Why Biotechs May Bounce 6-6-02
biz.yahoo.com
Thursday June 6, 5:30 pm Eastern Time
INDEX INTELLIGENCE: BTK-Why Biotechs May Bounce, Frederic Ruffy, Optionetics.com
Biotechnology stocks keep falling and the AMEX Biotechnology Index (^BTK) was setting fresh two-year lows on Thursday. Over the past seven months, the biotech index has now fallen nearly 40%. The decline seems to owe largely to a growing sense of risk aversion among investors. Now, however, with BTK sitting more than 50% below its year 2000 highs, there is an important reason why certain stocks within the sector could soon stabilize. In a nutshell, many are falling into the “value” camp and could begin attracting the interest of long-term buy and hold strategies. If so, a biotech bounce is in the offing and it could begin within the next few weeks.
Perhaps the main reason for the ongoing sell-off in the biotech industry is a growing sense of risk aversion among investors and the perception that many biotechnology stocks are speculative investments. That is, since investors are paying greater attention to each company's tangible assets like earnings, and most biotech companies are unprofitable enterprises, investors have been more inclined to sell, rather than buy, stocks throughout the industry. The growing sense of risk aversion among investors has been evident acrossa number of industries. For example, over the past few weeks, low priced stocks within the Internet, wireless, and telecomm sectors have been among the greatest percentage losers. These low-priced stocks are also unprofitable. They are the type of high-risk investments that are the subject of investor disdain in the latest market environment. In other words, the speculative activity that was so prevalent during the dot-com heyday in the spring 2000 has effectively been quashed. Biotechnol have suffered as a consequence.
In fact, the AMEX Biotechnology Index, which measures the performance of sixteen different biotech companies, has been falling since September 2000. After topping the 800 mark on September 25, 2000, BTK began a twenty-month decline that has taken the index below the 400-level. In fact, on Thursday, the biotech index dropped below 370 for the first time since January 2000.
Now, however, the decline may experience a momentary hiatus because some of the stocks within the sector are approaching important price levels. Specifically, while most of the companies within the biotech industry struggle to generate earnings, many are not without assets. In fact, looking over the net cash positions and book values reveals that some of these stocks may actually be bargains. For example, Celera Genomics Group-Applera Corp. (CRA) now trades under $13.00 a share, which is well under its book value of $16.00 a share. In addition, the company sits on cash equal to roughly $13.50 a share. To a value investor, these are extremely attractive characteristics.
In addition to traditional value investors, who gauge a stock's worth based on book value and other balance sheet items, there is another important group on Wall Street that is likely to begin showing a greater interest in biotechnology strategies. Specifically, quant funds, or professional investors who use financial models and quantitative strategies to build stock portfolios, often use book value as one of variables for making buy and sell decisions.
This process of building portfolios based on book values is largely the result of the work of Eugene Fama and Kenneth French of the University of Chicago. In the early 1990s, the two scholars made a convincing case for the merits of value ing relative to growth investing in one of the most important financial-related academic research papers of the time (Fama, E.F. and K.R. French, “Common Risk Factors in the Returns of Stocks and Bonds,” Journal of Financial Economics, February, 1993). In their study, the scholars ranked a universe of stocks based on book value (relative to market value) and created groups (deciles) of growth and value stocks. Stocks were placed into groups and re-ranked each year from the early 1960s until 1990. In a quick summation of their findings, over that time, the top value group produced returns of 21.4%, compared to only 8% for the top growth stocks. In other words, value trounced growth investing from 1963 to 1990. Their findings compelled many investors (including pension funds, mutual funds, and other large institutional investors) to adopt a value approach when structuring portfolios. The key factor in creating these “value” portfolios is book value.
Therefore, oftentimes, when a group of stocks begins to approach or fall below their book values, they become the subject of interest to large institutional investors who base their buy and sell decisions on financial models. Many use the work of Fama and French as a guide and restructure portfolios quarterly. Therefore, with only a few weeks left in the second quarter 2002, many of the battered biotechnology stocks may begin to appear on the radar screen of some of these large quant funds and that, in turn, could mean a biotech bounce is in the offing.
Over the past few weeks, Index Intelligence covered the following indices:
Date Index Ticker
02/27/02 PHLX Stree nternet Index ^DOT
03/11/02 Dow Jones Industrial Average ^DJX
03/13/02 PHLX Bank Sector Index ^BKX
03/14/02 Dogs of the Dow ^MUT
03/25/02 MS Retail Store Index ^MVR
03/26/02 PHLX Wireless Index ^YLS
03/27/02 PHLX Semiconductor Index ^SOXX
03/28/02 PHLX Defense Sector Index $DFX
04/01/02 AMEX Oil Index ^XOI
04/04/02 MS Commodity Related Index ^CRX
04/05/02 Buy-Write Index ^BXM
04/09/02 Nasdaq 100 QQQ Index QQQ
04/11/02 CBOE Internet Index ^INX2
04/12/02 S&P 100 Index ^OEX
04/15/02 Trader's Index ^STI.N
04/16/02
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^SVX
^SGX
04/17/02 AMEX Disk Drive Index ^DDX
04/18/02 AMEX Airline Index ^XAL
04/19/02 MS Consumer Product Index ^CMR
04/22/02 PHLX Oil Service Index ^OSX
04/23/02 DJ Transportation Average ^OSX
04/26/02 PHLX Fiber Optics Index ^FOP
05/01/02 Ten-Year In dex ^TNX
05/07/02 Oil Service HOLDRS OIH
05/08/02 Broadband HOLDRS BDH
05/09/02 PHLX Forest and Paper Index ^FPP
05/10/02 AMEX Major Market Index ^XMI
05/13/02 AMEX Airline Index ^XAL
05/15/02 MS Cyclical Index ^CYC
05/16/02 S&P 500 Index ^SPX
05/17/02 AMEX Pharmaceutical Index ^DRG
05/20/02 PHLX Gold and Silver Mining Index ^XAU
05/21/02 AMEX Broker/Dealer Index ^XBD
05/22/02 AMEX Japan Index ^JPN
05/23/02 DIAMONDS Trust Series DIA
05/28/02 Dow Jones Utility Average ^DUX
06/03/02 30 Year Interest Rate Index ^TYX
06/04/02 PHLX Box-Maker Index ^BMX
06/05/02 AMEX Natural Gas Index ^XNG
Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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