Bad shareholders and good shorts. That's what I feel like right now when it comes to biotech, the once-blessed now-cursed group that has fallen so out of favor that you have to wonder where, exactly, is intrinsic worth.
It's very difficult to have to cut your losses and move on from a group that has given you so much performance. It is clear, though, that biotech is under such pressure that you have to wait to see where it can bottom, even if that means missing the bottom.
Ever since we began hearing about price gouging for older drugs that are off-patent but just not made by generic companies, this group has been in free fall.
They are all being taken out and shot.
Normally, that would mean it is time to start doing some buying. After all, it is pretty clear that most of the terrific research biotechs aren't trying to buy old drugs and just pump up the prices, but are actually trying to invent new drugs that have amazing benefits.
It doesn't matter, though, because we now have Congress investigating pricing and a politician, Hillary Clinton, who seems to have found her footing by attacking pharma of all shapes and sizes. There are certainly just enough bad actors out there who have taken advantage of the lack of manufacturing ability to take up the prices of drugs that can't be mass produced away from them that the demonizing has gravitas.
Just one look at how Valeant (VRX) -- known, along with Horizon Pharma (HZNP), as a company that has taken advantage of the imperfections in the system -- got clobbered yesterday after saying it is having a great quarter, tells you how little trust there is now.
I think that the ownership of these stocks is your biggest enemy right now. There are three kinds of holders, and they are all horrendous in their inability to stay the course.
First, there are the people who own biotech through ETFs. These people are part of the brainwashed cohort that believes the ads which say "you can't pick one vs. the others so why not own them all." Now, normally I would say this is a blessing in disguise because the ETFs can pull down the good with the bad, and you can then scoop up the good. However, there's probably more money chasing the ETFs than the individual stocks, so it's a self-fulfilling prophecy.
The second group? Hedge funds and aggressive growth mutual funds who think they can stay the course, but every day come closer to puking them up. They will create the bottom when they do, but they aren't there.
Finally, individuals who watched fortunes being made in companies they didn't know or understand and now find themselves scrambling to see what these companies do. These shareholders are accidents waiting to happen.
With that cast of characters, it's difficult to just stay invested, especially when you know that there are plenty of hedge funds who are now shooting against all three constituencies, again, using the ETFs to be sure they don't own one that's taken over. In fact, the ETFs are much better for the shorts than the longs, because they eliminate single stock takeover risk.
All of these negatives mean one thing: you have to wait. You can nibble, but anything bigger and you are liable to lose big money. For the moment they are just an asset class that is hated. Their time will come again. But not here, not now, no matter how amazing -- and many really are amazing -- their discoveries and formulations are.