The biotech bear market from February 2021 through October 2023 created some dramatically underpriced stocks. There is free money lying on the sidewalk, just waiting for you to pick it up.
Dear Biotechies:
Rents were high a year ago, so the S&P 500 fell 68 points on Tuesday after the Consumer Price Index for January was announced. If that doesn't make any sense to you, this is how Wall Street shakes out the weak hands so they can buy cheap stock. Headline inflation dropped from December's +3.4% to +3.1%, but – horrors! - economists expected +2.9%. Core inflation rose 3.9%, matching December and above the +3.7% expected.
The Bureau of Labor Statistics said: “The index for shelter continued to rise in January, increasing 0.6% [that's year-over-year – it was +7.6%! month-over-month] and contributing over two thirds of the monthly all items increase.” As you know, the index for shelter lags reality so badly it reflects rents and house prices 12 to 18 months ago. Yeah, from July 2022 to January 2023, housing costs were shooting up. I know at least two people who don't care – me and Chairman Powell.
In addition to the out-of-date shelter index, Goldman Sachs added: “The CPI largely reflected start-of-year price increases for labor-reliant categories such as medical services, car insurance and repair, and daycare, and we assume inflation in these categories returns to the previous trend on net in February and March.”
h/t @GregDaco
And as Austan Goolsbee, the President of the Chicago Fed, said: “Our 2% target is on PCE not CPI...It is totally clear that inflation is coming down.”
Market Outlook
83% of US companies are beating estimates, the highest level in two years and well above the upper end of the pre-pandemic range. The S&P 500 added 0.6% since last Thursday, clearing 5,000 to a new all-time high today. At 20.3x, the S&P 500's forward Price/Earnings ratio has risen above 20x for the first time in two years. The Index is up 5.4% year-to-date. The S&P hasn't fallen by more than 2% in a day since 2022. Since January 2023, the magnitude of daily rallies has been greater than selloffs, averaging +67 basis points (bps, or 0.67%) on up days versus -60bps on down days. As my friend Kieth Fitz-Gerald pointed out, since 1927, the markets have spent 83% of the time at or within 10% of all-time highs.
The Nasdaq Composite gained 0.7% and set a new 52-week high. It is up 6.0% for the year. The SPDR S&P Biotech Exchange-Traded Fund (XBI) climbed 4.5% as the sector finally caught a bid. It is up 3.3% year-to-date. The small-cap Russell 2000 jumped 4.1% and finally is up 1.7% in 2024.
BofA's Bull & Bear Indicator moved up from 6.1 to 6.8 “driven primarily by strong inflows to risky Emerging Market assets.” There's room to go higher, but we're running out of new buyers.
h/t Daily Chartbook
The fractal dimension is very extended and for the first time in many years I am looking at put protection against a broad market decline.
Economy
The Atlanta Fed's GDPNow model reduced its March quarter real GDP forecast from +3.4% to +2.9% due to reduced estimates for both personal consumption expenditures growth and gross private domestic investment growth. They still are substantially above the consensus expectations.
For the first time since April 2022, BofA's Fund Managers Survey investors are not predicting a recession (top). Global growth optimism is also at its highest since February 2022 (bottom).
h/t @dailychartbook
But tax refunds are down a whopping 57%, which is sure to hit spending by low income households.
h/t @zerohedge
Also, every time US government tax receipts declined, the US was in a recession. When they were this low, the US was reeling after the dot.com and credit bubbles.
Biotech Notes
Many development-stage biotechs have programs that fail, run out of money, and die. Others almost die, and as Billy Crystal said in The Princess Bride: “There's a big difference between Mostly Dead and All Dead.”
Mostly Dead, also known as Near Death, means they have a chance to come back. The must-follow Biotech Investor (@learnbiotech) just updated his “From Near Death to >$1B Buyout” table to include Pfizer's acquisition of Trillium. Pfizer has done this twice before with Array BioPhrma and Medivation. Gilead Sciences is on the list twice for Immunomedics and this week's CymaBay Therapeutics.
h/t @learnbiotech
Biotech Investor ranked his table by absolute return from the near-death experience to the buyout. It's capped by AbbVie's 200x acquisition of Pharmacyclics, but that took six years. Here is the table reordered by Return Per Year:
On average, these companies get acquired for a 21x return after three years. If you leave out extremes of the two highest (Ambrx Biopharma and Trillium) and the two lowest (Medivation and Array BioPhrma), the middle seven companies averaged 16x in just under three years.
Obviously, buying stocks of companies that are near death is very risky, if only because of the dilution they almost certainly face to survive. But the returns on survivors that get acquired are huge.
Coming Events
Monday, February 19
Markets Closed - Presidents Day
Biotech Moonshots Portfolio Update
This was a meh for the portfolio as it slipped 1.1%. There's enough clinical and other data coming to drive our performance much higher in 2023. Let's dig in...
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Your realizing I was wrong about Putin's motivation Editor,
Paid subscriber or not, if you would click the ♥ symbol below it would really help me get the word out.