Chris Forte’s “Thoughts to Start the Day” – Biotechs

Posted on July 15, 2022 by Scott Shuda

The term “FANG Stocks” was coined in 2013 by CNBC’s “Mad Money” host Jim Cramer. I’d like to coin the phrase “Biotech Bounce” – that’s what I think may happen over the coming year.

Biotech firms without revenues (fondly called “pre-revenue”) are bets on future profits. Unfortunately as rates rise their future cash is worth less. Also as the market get more risk-averse biotechs are some of the first companies to get thrown overboard.

The two most watched plays on biotech are The SPDR® S&P Biotech ETF (XBI) and The iShares Biotechnology ETF (IBB). XBI is small/mid-cap and IBB is large-cap.

Both indexes have been clobbered. The IBB index for instance was down 32% at one point this year. It has trimmed the loss to -21% over the last month. Is a rebound already underway?

According to Luke Lango of InvestorPlace, “A recent Bloomberg screen of biotech stocks found that 86 companies are trading for less than their cash value. That’s a jaw-dropping number. Indeed, over the past 25 years, biotech selloffs have usually bottomed out with about 20 stocks trading below cash value. We’re at more than 4X that number today. Fundamentally speaking biotech stocks are more undervalued today than they’ve been in the past 25 years. And it’s by a wide margin.”

An unusually high number of biotech stocks are trading at a “negative enterprise value,” meaning it has more cash on its balance sheet than its market value and debt. This can be a sign the company is undervalued. For instance a $100M market cap company with no debt and $120M in cash has an enterprise value of negative -$20M. Negative enterprise value stocks aren’t common – some will go belly up but others will work out well. Studies show they often turn out to have attractive returns.
 
In my opinion biotech is the proverbial beach ball pushed underwater – its due for a bounce up. Biotech stocks can be explosive in both directions. Which brings me to another phrase I like…the “Biotech Bombshell.” One day everything is fine – the next day bad news sends a torpedo into your Biotech Love Boat. Boom! Not fun. Be careful.

In my own portfolio I have Abcella (ABCL), Rocket Pharm (RCKT), and Kezar (KZR).
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QUICKIES
*ARF! Do you think only small caps go down hard? How is this for some barking dogs?
YTD Dow laggards…Disney -41%, Nike -39%, Salesforce -38%, Cisco -34%, JPMorgan Chase -31%.
*
ARK Innovation (ARKK) is up 15% over the last month.
*For the first time since May California’s gas prices fell
below $6 a gallon. Demand is declining. Bloomberg says the state’s gas stockpiles have increased 23% above average despite refining production lagging 8%.
*
GM and EVGO plan to install 2000 fast charging stations at 500 Pilot truck stops to kickstart taking EVs nationwide.
*I can’t Bear it. A CNBC poll of 800 US adults reveals the most bearish sentiment they ever found. Of the “Best Investments Right Now” investors say Real Estate at 38%, Gold 24%, Stocks 19%, Crypto 11%, cash 10%
*
Ashleigh Day’s Elite Call is out on YouTube and The Feed.
*Check out ”
Richardson Electronics Is Having An Interesting Product Cycle” by Long Cast Advisers published on Seeking Alpha. Link is on the Feed

It isn’t necessary to be rich and famous to be happy. It’s only necessary to be rich. – ALAN ALDA

Good luck to all – Chris

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