November 11, 2013

Sector Pullback Makes Biotech a Buy

by Steven Halpern for The Daily Guru

Despite the fact that the biotech sector has faced some setbacks recently, Jay Silverman, editor of Medical Technology Stock Letter, is confident it’s only the case of a normal correction.

Steve Halpern: We’re here today with biotech sector expert, Jay Silverman, editor of the Medical Technology Stock Letter. How are you doing today, Jay?

Jay Silverman: Very well. Thank you, Steve.

Steve Halpern: After an exceptionally strong performance over the past year, the biotech sector’s been noticeably weak in the past weeks or months. Some pundits have been suggesting that the biotech boom may be over, but you’ve taken a much more measured approach and have seen this weakness as a normal correction. First, you’ve looked at the technical factors. What do you see there?

Jay Silverman: Well, since the shock of early October, when the market collapsed dramatically in a couple of days, stocks rebounded, but failed to reach new highs, and that has led to what I call negative momentum.

And, at the same time, there was rotations out of biotechs into other high beta technology stocks, such as the Internet and technology plays; Apple (AAPL), Google (GOOG), and the like, so the momentum players—which are not fundamentalists, but on the way up, are helpful participants—they are in no rush to hurry back into the bios, as the technical charts don’t dictate that.

Steve Halpern: Now, you’ve also noted that the mega-cap biotechs have joined in the latest sell-off. Is that a reason for concern?

Jay Silverman: Yes it is, and those are what I call the mega-caps, which are the most successful in largest companies, by both sales and earnings, and even market cap, held on relatively well in October and it was just like the quality, and as long as they had done.

Well, the group sort of was in good shape, despite the fact the smaller names had imploded very recently, particularly the last few days, because big-caps have, what I call, succumbed to the industry pull-back and when you have the leadership stocks go negative that also adds to the short-term pressure on the group.

Steve Halpern: Now, adding to the negative environment here, you’ve also pointed to a flood of new deals. How has this impacted the overall market for biotechs?

Jay Silverman: Well, when the biotechs do well—this has been a year when the IPO window has been wide open and nothing’s been stronger—then IPOs make fantastic near-term and short-term and immediate gains.

Some of the biggest leaders in that field, and there have been dozens in fields, if not more this year, such as Bluebird (BLUE) and Stemline Therapeutics (STML) and have all pulled back to significantly lower levels; even below, in Bluebird’s case, the price that had actually opened up as an IPO, even though it’s above its IPO price.

That is usually when the speculative nature of a group sort of starts to really disappear.

Steve Halpern: Despite the recent selloffs, investors still have strong gains for the year. You’ve mentioned that fear at the current time has overtaken greed. Could you expand on that?

Jay Silverman: Yes, I think, because it’s been such a phenomenal year for most biotech stocks in the indices, many investors will be okay with a normal pullback in the 10%, maybe even 15%.

But, as it starts to accelerate, and I think, exceed, let’s say 20%, then people start to say, “Wait a second, maybe I’m going to lose a bunch of these wonderful gains in 2013, let me lock in some of these profits now and I’ll forgo the rest of the year.”

Valuations have been stretched a while, so I believe that is clearly one of the drivers of the recent pullback, is that people got a little bit scared after a while and saying, “Oh no, I don’t want to give back that much.”