Biotech After The Coronavirus Outbreak: Real Boom Or Bounce?

If the world is ending, nobody told Wall Street. Stocks are once again in sight of record territory. It’s business as usual.

But take even a brief look at who’s leading the rally and it’s clear that investors have outbreaks on their minds. 

A healthy 26 stocks have soared 80 percent or more over the past month. And an overwhelming 84 percent of them are either biotech developers or make the equipment and diagnostics associated with them.

Admittedly, most of those stocks have given back most of that initial panic surge. Their relationship to the outbreak was peripheral at best, so their gains were more a factor of the market’s fragile mood than any material catalyst.

That’s all right. If you owned shares in those companies, you were either there for the long haul or you were eager for an opportunity to cash out. 

A surprising number of investors are in that second category: frustrated and out of patience. After all, the majority of these baby biotech companies are still nursing significant losses from the past year.

Sentiment in this group was simply too depressed. The recent rally wasn’t enough to make them whole. But that is changing now.

Between Biotech Bust and Bubble

Biotech stocks, as measured by the benchmark iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB), peaked in 2015. They’ve come a long way back from the depths, but they’re still down a net 8 percent. 

The S&P 500, meanwhile, has rallied 60 percent in that period. Some biotech investors participated in that big bull run, but too many of the giants that dominate the industry were dead weight.

You just can’t see a lot of sunshine when Gilead Sciences Inc. (NASDAQ:GILD), Biogen Inc. (NASDAQ:BIIB), Alexion Pharmaceuticals (NASDAQ:ALXN) and even my beloved Regeneron Phamaceuticals Inc. (NASDAQ:REGN)  have gone straight down in the last five years.

Those four stocks alone account for 20 percent of the IBB portfolio. Every other company in the industry put together just hasn’t been dynamic enough to overcome that big shadow and join the rally.

The therapies are still moving through the clinical process toward ultimate regulatory review and the moment when they can start changing lives. It’s just the stocks that stalled.

This outbreak may be the moment that reminds Wall Street how transformational those therapies will be, how much disruption we’ll have to endure without them and why the companies are worth funding.

We’ll see. In the meantime, the industry has lagged so long that it has a shocking amount of ground to capture before it even catches up to the rest of the market. 

And it’s why I tripled down on biotech in my new IPO service. As these stocks finally deliver on their ultimate potential, this is where we’ll outperform.

This is the future. Company by company, these scientists are pushing back the borders of medicine to ensure that outbreaks like coronavirus are recognized early and treated effectively.

As long as the executives around them build viable businesses out of those treatments, the stocks are worth our attention. The winners make their way to GameChangers and ultimately earn a spot in big index portfolios like IBB.

My job is to become familiar with them when they’re small and then alert other investors when the path to success opens up. Some baby biotech companies take years to get moving. Until they do, they’re dead money.

Watching stock after stock surge in the last few weeks makes me think the dead money era is over. If so, all lights turn green for the group. 

I’d start with IBB. It’s actually significantly cheaper than the S&P 500 right now on an earnings basis and is roughly comparable in terms of book value. These are not bubble stocks. They’re fairly priced.

And the upside is spectacular. At minimum, biotech earnings expand 2 percent faster than what you’ll see from the S&P 500. Since this is still a young growth industry, growth hasn’t faltered while the market as a whole stalled.

Biotech earnings ramped up at a double-digit-percentage rate last year. Profits on the S&P 500 went nowhere. Where would you rather be?

The cannabis wars took another big step toward resolution last night when the CEO of Aurora Cannabis Corp. (NYSE:ACB) retired a few days before the company’s earnings report.

The sudden resignation amounts to a surrender. He can’t turn the business around and is unwilling to spend more time trying.

And while fans of the company can argue that the strategy will not change because the now-former CEO remains on the board of directors as a lieutenant takes his place, “business as usual” here is not an ideal scenario.

ACB also preannounced a $1 billion accounting charge, cut 25 percent of its executive payroll and warned us that revenue is coming in, at best, flat compared to last year.

That last detail is the really hard one. I thought cannabis was one of the consumer growth markets of our age. If the second-biggest company in the space can’t expand its sales, something is seriously wrong with the business plan.

I see this as an opportunity to buy the dip on every other cannabis stock. Canopy Growth Corp. (NYSE:CGC) will exploit any weakness its rival’s management transition reveals.

Smaller cultivators become interesting as well. But I am not buying ACB here.