April 15 Biotech Update
Another day and nothing to talk about except more selling. There is really nothing more to say at this point that has not already been said. There is a significant correction in the growth sector of the market and funds are hitting the sell button every day and it will continue despite the fundamentals of any given company. Yes, there are some relative outperformers (large caps are doing better than small caps) but there is really no reason to over think what is happening. At some point the sellers will have dumped all their shares and the stocks will stabilize. At this point, the fundamentals will get back into picture but until then it is what it is. I wish I had something more insightful but this just looks like sellers blowing out of their shares and nothing is going to stop them from selling and the sector (or high growth names in general) will not recover until they are done. Given this, the natural buyers at these levels do not want to catch a falling knife and so are stepping aside and waiting for the carnage to slow. This just exacerbates the moves lower and will cause many (most) stocks to overshoot to the downside.
I have no idea what would be the catalyst that would stop the slide. As I said before I think it is something that is not expected in that no one expected a congressional letter about Sovaldi pricing and that was the proximate cause of the start of the slide (but was really more an excuse to sell as opposed to a cause). I think many are thinking (hoping) that large cap earnings might be enough to end the slide but I am not convinced. Look at the reaction to the JNJ earnings today. In addition, is this selling really related to large cap earnings in 2014? It is about the future and fear about the earnings 3-5 years out (among other concerns). So would a beat and raise suddenly make investors rush back in? It might cause a short relief rally but we have seen that before. Perhaps if the companies announce massive new accelerated buyback programs, we might get something more sustained but at this point it would take a significant move like a large buyback or an acceleration of M&A in the sector.
The alternative to news out of nowhere sparking interest in the sector again is valuations getting cheap enough to interest value (or deep value investors). Clearly we are not at those levels and it may very well take another massive flush or two to get the deep value investors interested. Large caps are cheap at this point but probably not enough to really interest deep value investors and I doubt a deep value investor would be interested in a small cap unless it were trading at a discount to cash. This is not my base case at this point but if this slide is to end by stoking value investors, then we have more downside to experience.
I will end it here as there really is nothing to do expect follow the fundamentals of the companies you are interested in and wait for deep values to develop and be opportunistic. This strategy is unlikely to pay off in the short term but anyone with a longer term outlook is getting value at these levels (and better value when(if) we go lower).
Have good day.