Biotech and Tech Stocks Take a Beating

Mar 26, 2014   //   by Profitly   //   Profitly  //  Comments Off on Biotech and Tech Stocks Take a Beating


The major stock indices may be sitting near record highs, but some big names are in the midst of a rough patch. The two sectors getting hit the hardest right now are tech and biotech.

This post isn’t meant to make a bullish or bearish case on these sectors, I’m  just giving you an example of news that can lead to volatility and trading opportunities since even though many of the Profitly gurus don’t make macro-economic news their main focus, they do keep an eye on what’s going on in different sectors, especially “hot” sectors like tech and biotech. If you want to learn how to trade and be as successful as them, you need to do the same.

The gurus also watch the big market headlines to see what are the main things on the minds of investors and what type of stocks may be moving the most on the news. For example, with the news that marijuana had been legalized in some states, stocks related to marijuana were hot for a while. Also of note is that it is slightly less likely that a stock will crash if the general market is in a major rally. It’s not impossible, but it can be a factor in determining where the momentum lies.

Right now we have the iShares Biotech on track to close below its 100-day exponential moving average for the first time since late 2012. Then there is the fact that momentum stocks like Tesla, Netflix, Twitter and others are al having a tough time right now. After more than doubling after its IPO, Twitter is now down nearly 13% over the past month. And after climbing more than 500% last year, Tesla is down more than 10% over the past month.

But even with the recent sell off, the biotech-sector ETF is still up 53% the past 12 months, which is a ways ahead of the 19% advance in the S&P 500.

What’s leading to the sudden decline? There are a few sector specific events, but these stocks were some of the best performers last year and have some of the more “expensive” valuations, meaning investors are more likely to get out of these stocks before others. Then there is the fact that when people get worried about the market being over-valued, they head to safer plays. This has brought about a frantic rotation out of cyclical, economically-sensitive sectors like technology into more defensive areas like utilities over the last few weeks.

Last week Friday’s biotech selloff caused Biogen Idec (BIIB), Amgen (AMGN), Celgene (CELG) and Regeneron (REGN) to plunge. Why was Friday in particular such a rough day? Analysts are blaming a letter to Gilead Sciences (GILD) which questioned the price of its hepatitis C drug and ended with speculation of a biotech bubble. But one of the largest firms on Wall Street, JPMorgan, says everyone should keep in mind that this sell off in particular was just based on speculation.

It’s not just individual stocks either, mutual funds with higher exposure to things like biotech have also been hit harder than more defensive funds. Yet, Wall Street doesn’t seem to be extremely worried, as noted with JP Morgan defending GILD above. Analysts have conceded that a pullback may happen in the near future, but they went on the defensive to say that valuations remain near historical norms.

Here is what JP Morgan said:

After two years of dramatic outperformance, concerns about valuation and a “biotech bubble” have emerged. We believe that the sector remains broadly attractive from a valuation/pipeline/growth perspective, particularly in large cap. Notably, the average 3-year revenue and EPS CAGR for the top 10 biotechs (market cap) is 4.5X and 3X that of the S&P500, yet the P/E/G on 2015-2016 forecasts for biotech is ~0.7 versus the S&P at ~1.4. Regarding the industry pipeline, product cycles are very long in biotech (>10 years) and dozens of major launches are occurring or are about to occur ([Gilead’s] Sovaldi, [Biogen Idec’s] Tecfidera, Imbruvica, Pomalyst, [Celgene’s] Otezla, [Regeneron’s] Eylea, Kalydeco, Xtandi, Linzess asfotase alfa, Vimizim, idelalisib, evolocumab, alirocumab, etc.). In addition, we estimate that at least 50+ compounds/label expansions that have some level of derisking are largely unaccounted for in Street models. Admittedly, companies with earlier-stage pipelines that haven’t been fully de-risked are being awarded a higher probability of clinical success, but drug development has become more efficient, particularly for orphan drugs. The recent concern on pricing for Gilead’s Sovaldi has caused much anxiety; at the end of the day, the benefit/risk and cost/benefit profile remains quite striking and we doubt that the recent Congressional inquiry would lead to an “innovation tax” (i.e., forced material discounts).

This is just a brief example of the type of news you should be looking at when doing your research. You need both broad and company specific information. Knowledge is power in this business!