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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: scott_jiminez who wrote (1384)	8/4/2000 3:29:22 PM
From: Biomaven	Read Replies (1) \| Respond to of 52153

scott, Your point about the psychological component of stock prices is clearly valid. On a fundamental basis, the underlying biotech industry was no more or less valuable in early March at the speculative peak (BTK=800) than it was 2 months later when the BTK index had halved. (It was more valuable at the peak than it was some months earlier when the BTK was also at 400 because of greater liquidity as a result of large stock offerings by existing companies). This swing is actually even more extreme than it looks because it happened independently of an overall market rise and decline. (Of course it was very closely tied to the Nasdaq vs. Dow decline). Thus we can demonstrate swings of at least a factor of 2 caused by issues other than fundamental valuation. Now realistically there is no way to forecast these shifts in market sentiment. But does that mean we need to throw up our hands and have recourse only to long-term holds of a biotech index fund? I don't believe so. First, in the very long run, stocks will find something approaching their underlying value. I don't really know if AMGN should have its 70 billion market cap or whether it should be 40 billion or 100 billion. (I will confess the lower figure seems more reasonable even though I own a little. <g>) I do know it should not currently be 140 billion or 20 billion. However, clearly if you had bought AMGN early and held you would have been substantially rewarded no matter what the current market view of biotech was today. Thus if you can find long-term winners (in the market-place, not just the market) and hold them for several years, you will do well despite the market fluctuations. (For that matter one can even hedge out a good bit of the overall biotech market risk). Thus I am at heart a stock-picker. I was prepared to put over 20% of my liquid assets into one stock (SEPR) in 1997 and hold them to this day because I believed the story. Generally though I believe strongly in the basket approach to biotech investing because you can always be blindsided in any one stock. However it is awfully tempting to try to time the market and/or hang on for the speculative frenzies that do sometimes occur. My personal stance is to basically be a long term (multiple year) investor, partly because of the tax and transactional efficiencies that ensue. However, I do try to take a more cautious overall stance when we are in a frenzy. (One technique I use is to put a dollar cap on my total holdings and sell something whenever this cap is exceeded. I don't always have the discipline to do this - it's awfully tempting to let things ride another few days. I also stand ready to sell whenever we get a one-day frenzy in any individual stock I hold. (I call holding stocks that might seriously pop in the short-term "ENMD-roulette"). Thus my notion is that you lighten up some when you get a frenzy and buy some when you get undeserved doom and gloom. (The semiconductors' blood-in-the-streets). There is no way you can time this right consistently, but you just have to do the best that you can, and recognize that luck here is more important than skill. There are also some hints that may help one time the entire sector. (Of course these are most easily seen in retrospect. <g>) What is the news flow going to be like over the next several months? What is the level of secondary offerings and IPO's? How are they being received? (In retrospect a good day to exit the sector in March would have been when the "pop after a secondary" pattern stopped). For around six months (January through June) the biotechs vs. drugs matched the Nasdaq vs. the Dow. This pattern has pretty much been broken now. There was no way (that I could see) to make money from the pattern (moves happened in total synchrony) but it to some extent "explains" the crazy first six months of this year in biotechland. Where do we stand now valuation wise? Biotechs are certainly not cheap at these levels, but my guess is that we are going to see some continuing good news flow over the next year and more. I certainly wouldn't be on margin at these levels, though. Peter