A Fresh Dose of Biotech Perspective
Dear Wall Street Daily Reader,
Warren Buffett liked to say, “It’s only when the tide goes out that you learn who’s been swimming naked.”
He should have ended that line with “swimming naked and swimming scared.”
Because whether it’s biotech or micro-caps (or this week, crypto currencies), a nasty bout of volatility tends to cause panic attacks for wide swaths of investors.
I know this all too well. Why? Because every time there’s volatility, my inbox overflows with pleas for explanations.
Over the years, I’ve learned that, just because people own something, that doesn’t mean they necessarily understand it.
After all, there’s no test to pass before you buy a stock, right?
Sadly, many people don’t make the time to understand their investments until prices drop sharply.
With that mind, I’m serving up some fresh perspective today on one of my favorite sectors: biotech.
The goal? To clothe you with calm so you can carry on — and keep profiting, of course.
So let’s get to it…
Drawdowns Be Damned
As a follow-up to my April 26 perspective on the biotech sector, I wanted to share this key chart, courtesy of my friends at Bios Partners.
It shows pullbacks in the SPDR S&P Biotech ETF (XBI) for the last decade.
For those unaware, XBI is a more relevant biotech index for me to track because it’s biased toward smaller names versus the iShares Nasdaq Biotechnology ETF (IBB), which is dominated by the largest names.
The purpose of tracking either of these indices couldn’t be more straightforward:
It’s to understand what’s typical for the sector, so we can calmly weather the current storm.
And as you can see, what we’re experiencing now is perfectly normal.
Or as Bios Partners told clients in a note, “Over the last 10 years there have been four material consolidations, each ranging from -29% (2014) to -45% (2015 to 2016).”
In other words, the current 30% drawdown is well within the normal range.
Keep in mind, this data represents the average drawdowns. Therefore, individual biotech stocks are falling by even more. In fact, it’s not uncommon for micro-cap biotechs to be off 50% or more during these drawdowns.
But, there’s still no reason to be afraid.
Based on history, and based on the trading action in the last week, the four-month bear market for biotechs appears to be coming to an end.
But forget the average drawdown amounts…
Here’s the key observation from the chart above…
Biotech Be Nimble, Biotech Rebound Quick
You’ll notice, in three out of four past drawdowns, biotech stocks snapped-back quickly. And then kept rallying to fresh highs.
It makes sense, too.
Since biotech stocks are all about data, data, data — and such data is only updated periodically, not daily — as fresh data is released, stocks regain their footing and then some.
We’re about to get a fresh round of data in a matter of weeks at a major industry event — the American Society of Clinical Oncology (ASCO) Conference, which starts on June 4th.
Bottom line: As investors, we need to understand that panic selling at the point of maximum pain is a terrible wealth-building practice. By the time you regain your calm and senses, you’ll likely be paying up to get back in. So don’t try it.
If the only thing that’s changed with your favorite biotech is the price, stay the course. Your bottom line will thank you for it later…
And I will, too, as I should get fewer nasty grams in my inbox!
Ahead of the tape,
Editor and Founder, Trend Trader Daily