More biotech analysis from Krishna Bharathala and Charles Bagley

A Brief Update and History Lesson – Krishna Bharathala

On March 20th, the most popular ETF in the biotechnology sector, the Nasdaq Biotechnology iShares (IBB) hit an all-time intraday high at $374.62. This pricing was attained the same day Biogen reported positive data on it’s early-stage compound for Alzheimer’s disease. In addition to IBB, Biogen’s stock rose almost 10 percent for the day and added almost $30 billion in market value. However, in the following week we have seen startling drops in prices for the entire sector in addition to IBB which dropped almost 10%. Investors are selling their biotech stocks rapidly, popping a bubble that has been forming for the last six years. Since market bottom in 2009, IBB is up almost 500% versus just 200% in the S&P 500. This is an indication that perhaps the stock prices were highly overpriced for the current market.

However, we should not be too worried just as yet: this same phenomenon was observed last year, when IBB dropped 7.2% in the same time period between March 20th and March 25th. In the corresponding time period this year, the index has dropped 6.9%. The sector stabilized after turbulence and showed consistent growth over the past year. It will be interesting to see if this is a repeat event in the market or if this is actually going to be start of a downward spiral for the market. Either way, the index prices will be volatile over the next few weeks and could provide great opportunities to capitalize on.

A Slightly Longer (But Never Outdated) History Lesson – Charles Bagley

In 1934, Benjamin Graham had the following comments on the infamous stock market crash of 1929:

…particularly during the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks…. The new theory or principle may be summed up in the sentence: “The value of a common stock depends entirely upon what it will earn in the future.”

…[such beliefs] concealed two theoretical weaknesses which could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinction between investment and speculation. The second was that they ignored the price of a stock in determining whether it was a desirable purchase.

The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. yet the new-era theory led directly to this thesis…. Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price. Hence all upper limits disappeared, not only upon the price at which a stock could sell, but even upon the price at which it would deserve to sell. This fantastic reasoning actually led to the purchase for investment at $100 per share of common stocks earning $2.50 per share. The identical reasoning would support the purchase of these same shares at $200, at $1,000, or at any conceivable price.

An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy “good” stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic. Countless people asked themselves, “Why work for a living when a fortune can be made in Wall Street without working?” The ensuing migration from business into the financial district resembled the famous gold rush to the Klondike, with the not unimportant difference that there really was gold in the Klondike.”