If you’ve ever had the impression that biotech stocks seem to start slumping the moment you buy them, you’re not alone: many investors have had the unpleasant experience of discovering a trending biotech company when you buy them. ‘it was on the rise and buying stocks, only to see its price plunge significantly more or less immediately thereafter.
Don’t worry, you are not doomed to lose money in the biotech industry. But to avoid this spell, you will need to understand precisely what is wrong.
You buy the news instead of selling it
If you find that biotech stocks tend to go down right after buying them, the main reason is probably that you are investing right after these companies have seen major catalysts.
let’s use Annovis Bio (NYSEMKT: ANVS) for example. On May 21, he reported that in a Phase 2 clinical trial, his Alzheimer’s disease drug candidate appeared to improve patients’ cognitive functioning. This news has boosted the title by almost 150%, adding to an excellent race for the year. Then, as the market exuberance faded, the stock price contracted significantly over the next few days, although it remained much higher than its pre-May 21 level. and that it would later continue to grow even more.
But suppose an investor bought the stock while it was booming after hearing about the company’s impressive clinical trial results. Or maybe this hypothetical trader hasn’t even heard of the test data – what they did notice was that the stock was going up, so they bought some in an attempt to profit from it. ‘momentum. In such a situation, their investment would start to lose value more or less immediately – potentially up to 50% of its value in the case of Annovis.
It can be painful to sit on such losses, so it would not be too surprising if such a trader then sells the stock lower a few days after buying it to reduce their losses.
The problem is that our trader only invested in the stock after the market had largely integrated the expected value of its breakthrough. Additionally, it may take some time for Wall Street to reach consensus on such issues, especially in the wake of important news. So, by buying Annovis just when the market was most bullish on it – and before the hype died down, allowing the stock to return to a more reasonable level – a bad result was virtually guaranteed. .
Buy proactively, not reactively
The solution to this problem requires a change of mindset.
Rather than buying a biotech stock because you’ve read positive news that sparked a bull run, invest in it long before that news hits. You don’t need to predict the future to do this. What you need to do is become more comfortable with the uncertainty and double the diversification. Most of all, you need to plan ahead.
Suppose you want to invest in a biotech company as a long-term portfolio. Take Moderna (NASDAQ: mRNA) for example. By viewing his investor documents, you can find out what projects he has in his pipeline and roughly when management expects to offer updates on their progress. In Moderna’s case, the company plans to launch a Phase 1 trial for its vaccine candidate against cytomegalovirus, a long-term complication of COVID-19, at some point before the end of 2021.
If you think a cytomegalovirus vaccine could be very lucrative and impact Moderna’s revenue in the future, you’ll want to track the program as it develops and determine approximate dates when management could. supposed to educate investors about it – events that could precipitate significant changes in its share price. According to its website, Moderna plans to deliver a presentation to research and development (R&D) investors on September 9. There is no guarantee that the company presentation that day will talk about the project you are interested in, but it will likely at least contain new information that could catalyze a price movement.
The point is, if you want to benefit financially from the publication of new information, you must own the stock by then, assuming that is the only opportunity provided for such disclosure. Most likely, the news of the cytomegalovirus vaccine candidate with the greatest impact will come much later, when it is in its Phase 2 clinical trials.
Of course, you can’t know ahead of time if an interim update will contain favorable information or if it will be a dismal report of less than stellar results. You will therefore need to hedge your bets.
Diversify your holdings to reduce the impact of the unforeseeable
If you decide to buy Moderna shares before September 9, what if management reports that the project you are interested in has not lived up to their expectations? The stock will go down, of course, which will sting. But without taking that risk, it is much more difficult to take advantage of the alternate scenario in which the business reports success.
To reduce the potential negative impact of failures in one biotech, invest in another at the same time and ensure that your biotech holdings are only a speculative part of a larger, well-diversified portfolio. Then, bad news from a biotech company alone will not be enough to lower the value of your portfolio. And you will always be exposed to the potential benefits of the other biotechnologies you own.
To be clear, there is no magic in this method. Anyone can build a diverse portfolio, just as anyone can read a biotech company’s website and know when it might bring in good results.
The trick is to claim the agency over your buying decisions. While being proactive doesn’t always lead to high returns with specific biotech stocks, it will be better for your portfolio as a whole than buying them after the chickens have already flown through the coop.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.