good, but basic summary from bullmarket report
3. VOLATILITY AND INVESTING IN BIOTECH
Volatility! It is an old and tired term used to describe the current
market, but if there was ever a word that not only defined, but also
expressed the emotions and current state of the market, "volatility" would
be the hands-down, clear-cut winner. How else can one explain the
downward slide witnessed last week only to be rewarded with big double
digit gains over the last couple of days?
If anything, the positive results of Monday and Tuesday have brought a
sense of sanity to the markets and more importantly, to investors who were
growing weary of watching their respective gains of the past few months
and years give back approximately 10-15 percent of their value. It is not
an easy pill to swallow to watch stocks such as SciClone Pharmaceuticals
(SCLN, $10) drop 50 percent and especially hard to digest when one
considers that at one point, the stock had doubled in value over the last
few weeks.
Indeed, when it comes to pain, no other stocks contributed more of it then
did the ones that made up the Biotech sector. This is not to say that
other groups have not suffered over the last few days. However, the pain
was intensified as Biotech offered investors an opportunity to make up for
missing the beginnings of what would become a meteoric rise of the
Internet-related equities. Watching former small-cap stocks such as
Immunex (IMNX, $41) and Abgenix (ABGX, $95) hit the big time, vindicated
the Biotech investor and validated her foresight into the capital markets
as well as the future. As such, it becomes unnerving to watch the Biotech
pundits characterize and transform this vision almost overnight into
nothing much more than hype and speculation.
It is this atmosphere that caused investors not necessarily to panic, but
at least to reflect back and ponder whether the bull market had run its
course, and subsequently given way to the bears. Given the magnitude and
force of the decline in both the Nasdaq and the Dow, it was hard to remain
confident or convinced that things were going to turn around.
Let's be honest. Over the past three years many events have precipitated
a fall in the capital markets: The Asian Crisis, "Irrational Exuberance",
etc. In time, the markets always rebounded with authority and
consequently, conditioned investors to look at any decline in the market
as a potential buying opportunity. Up until the beginning of this week,
it didn't look like things were going to turn around in the near future.
Friday's nose-dive did nothing to help ease concerns that the market was
not going to turn around prompting commentators to suggest that picking
the bottom of the market would be as difficult and dangerous as "catching
a falling knife." Things looked scary and for all intents and purposes it
seemed as if people's fears were justified.
Well, as of Monday it appeared that someone was able to catch the falling
knife. The Nasdaq rocketed up 250 points, completely erasing Friday's
losses as well as ignoring the warnings suggested by the fact that for the
first time in years, the Nasdaq closed below the 200-day moving average.
Biotech recovered well with strong gains in stocks such as Human Genome
Sciences (HGSI, $68), Millennium (MLNM, $63), and the PE Biosystems (PEB,
$79). Biotech, it seemed, was back in the green.
Or is it? All investors hope that the worst is over and that the scare
was exaggerated and blown way out of proportion. However, we should work
to understand why this drop happened in order to prepare ourselves and
help avoid losses in the future. The collapse in the market was brought
on by one event -- the Microsoft ruling -- an event that helped pop what
had become a market that was looking for a reason to sell off.
This is not to suggest that ALL stocks were unfairly valued. However,
enough stocks had been run up to unrealistic levels; levels that could not
be justified using neither the traditional valuation methods nor the new
valuation metrics used to analyze the potential of the New Economy stocks.
What does Microsoft have to do with Biotechnology stocks? Simply put,
Biotech stocks do not exist in a vacuum and as such, are influenced by the
systemic risks that permeate the overall market. The Microsoft ruling
provided the stimulus people needed to unload much of their heavily
weighted technology and biotechnology portfolios.
Whatever one's opinion of Microsoft (MSFT, $80), its practices, and the
final punishment that the company faces, in time it will become apparent
to all that the sell-off in technology was unwarranted. Indeed, once
individuals understand that the company will survive this latest roadblock
and continue on with its success, capital will gradually start to reenter
the markets and help repair the damage.
Let's understand and agree that as a whole, the last few years have
provided investors with the greatest bull market of all time. And while
it took the Biotech stocks time to wake up, the sector made up for its
past sluggishness with an incredible infusion of capital from investors.
This said, let us also agree that of the stocks that benefited from the
bull market, there were a few that "rode the coattails" of stronger stocks
and became overly inflated in value. An environment of euphoria was
created over the past few years as investors couldn't go wrong and
euphoria quickly began to blur the line between speculation and smart
investing.
Speculation created the proverbial bubble that the bears of the market are
always screaming and yelling about when it comes to explaining why the
market is overvalued. This is where the problem is created, defined, and
best illustrated. People should not be equating investing with gambling.
But unfortunately in this new era of day trading, chat rooms, margins, and
stop-loss limits, many have found similarities between rolling a "7" and
picking out the next Genentech (DNA, $126).
It is believed that before the crash of 1929, John D. Rockefeller sold his
stocks after his paperboy offered him a stock tip. While the above story
is not to suggest that people should blindly sell-off their stocks, it is
to urge us all to take a moment, look over our portfolios, and understand
why we bought a particular stock in the first place. As more and more
people do this and start casting aside their speculative issues and hold
on to their fundamentally strong investment equities, the rewards will
prove to be great indeed.
I have written this before, but perhaps it is worth repeating in light of
the existing turmoil: The events of the past week should remind investors
that Biotech is a risky endeavor and as such, investing in the sector
should not be taken lightly. One needs to understand that we are still in
the earliest stages of reaping the rewards Biotech will offer to humankind
over the next few years. It is important to remember that we are getting
a head start in the biotech investment game. The potential of the
Internet may have reached only the 3rd inning of a baseball game, but
Biotech's potential has not even finished batting practice. |
