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Biotech / Medical : A Biotech Bonanza!
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To: LLCF who wrote (58)1/6/1998 10:48:00 AM
From: Giuseppe Scalamogna   of 64
 
Everyone,

Great ideas coming from some of you guys. For a very attuned general approach and lots of great info and insights, check out F. Jay Abella's Westergaard-Abella Bio/Medtech site at westergaard.com:8080/Med/biotech.html

Now to get to more general market dynamics. When analysts speak of the "January Effect" they focus too much on individualized picks and tend to forget about looking at sectors which could feel the winds of the January effect pick them up of their haunches. Looks to me like the Biotech Index has posted some nice gains in here and has not diverged from the rest of the market as has been the case over the past few months. This has been manifest in some individual issues who on light volume have posted hefty 5-10% advances over the past few days. Keep in mind that drugs in general is a safe haven for investors in bad economic times and one particular case of this has been the hefty advance in Merck & Co. over the past few weeks. Biotechs however tend to be much more risk-tendent issues so a correlation between advances in mega and large-cap pharmaceuticals vs. small-cap biotechs may not be very pronounced.

January will be a very telling month for biotechs. A few things to watch.

1) A rally of biotech over other sectors will tell us that the January Effect does apply to small biotech issues and will forecast demand for the sector over the coming year.

2) The sentiment of money-managers will be a function of the January effect and tell us how much risk they are willing to incur for possible premium returns to the major market indexes.

3) Keep a keen watch on what's going on in Asia and the general sentiment towards economic forecasts over the course of the first quarter. If problems in Asia persist and hit home in the US (keep in mind there is a lag between worl-economic problems and the impact on the US economy) the general market may spin backwards again. If this occurs money-managers and individual investors will again rotate out of small-cap issues into non-cyclical surefooted companies much as was the case in December.

4) The current destruction of the biotechs was a function of both rotation out of small-cap issues and the tax-loss selling because of a logical mentality associated with the market. In bad times, there is no need to mess around with risky stocks. Take the tax-loss now and armor your portfolio with large-caps.

5) Fundementals for biotechs have only continued to improve...increased drugs to market...record numbers of FDA approvals and the such. This short-term bump in biotechs (which may very well continue through part of 1998) is in my mind a great opportunity to pick up intrinsically undervalued biotechs whose success depends moreso on long-term milestones.

Good Luck to all

GS
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