Biotech stocks have finally entered bear market territory, with stocks now down about 22% from their previous high.[1] History is repeating itself, as it so often does. Recall that in 1992 biotech stocks doubled — sometimes tripled — in value in just a matter of months. For a time, these stocks were the sweetheart of Wall Street, but alas, in the spring of 1992 that bubble burst. And in 2000, biotech stocks once again took flight. Between July 1999 and the first months of the new millennium, biotech stocks boomed only to see the bubble burst once again.[2] Like Icarus flying too close to the sun, these stocks were due for a fall. Many are speculating that that scenario is playing itself out again today.
As early as Dec. 2013, speculation about the overvaluation had begun. That year, Don Seiffert of the Boston Business Journal wrote:
During the last two years, the Nasdaq Biotech index has grown by 120 percent as investors have poured money into early-stage drug companies at an unprecedented rate. Over the same two-year period, the Standard & Poor’s 500 index has risen 43 percent. It’s the first time since 2000 that the two stock indexes have diverged so sharply, and that’s given rise to speculation that we could be in the midst of another biotech stock bubble.[3]
On Aug. 17, Seiffert reiterated his opinion about the biotech bubble, with nearly two years’ worth of new data suggesting that he was on the right path:
My reason for believing that biotech is indeed in a bubble is that, while recent scientific breakthroughs are fueling an explosion of the number of drugs in development, the market valuations of those drugs depend on the ability of the industry to keep charging high prices. I don’t see how the U.S. healthcare system can continue to keep paying those high prices for all the new drugs that will come on the market in the next five or 10 years, even assuming most of them don’t actually make it there.[4]
Finally, in July 2014 Federal Reserve Chair Janet Yellen described the valuation of smaller biotech stocks as “stretched.” A written report further explained:
[V]aluation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.[5]
In response to this statement, Natural News‘s J.D. Heyes discussed the ramifications of an overvalued stock:
Does that mean that they’re not overvalued now – that a correction has already taken place and that biotech stocks are now priced right?
Or is biotech still over-priced, and perhaps even more so now? If that is the case, why is it the case? What good could possibly come from overvaluing any stock?
Long-term, there is nothing good that can come from stock market overvaluation, in any sector. Consider the tech bubble of 2000 or the housing and toxic home loan burst in 2007 that led to the Great Recession.[6]
For a long time now, people everywhere, not just stock market wizards or insider traders, have wondered about the possibility of a market correction. They speculated that a future market correction could make the 2008 crash look like a square dance, or, better yet as Bloomberg’s William Pesek put it, a “garden party.”[7] Personally, that’s a party I’d rather take a miss on.
As of the writing of this article, Apple’s stock is lower than its been in a long time; Disney fell nearly 8%; Starbuck’s stock is off 10% from its most recent high, and Facebook is down 13% from its peak. And Gilead Sciences, of the biotech sector, is down 15%.[8]
Natural News editor Mike Adams commented that anyone foolish enough to keep these stocks after this correction will be slaughtered like a sacrificial animal on the alter of the unforgiving marketplace. He said, “Even after this correction, Biotech stocks remain wildly overvalued, and investors who are foolish enough to hold them will be slaughtered as the full scale of the market correction unfolds.“[9]
Sources:
[1] ZeroHedge.com
[2] SFGate.com
[3] BizJournals.com
[4] BizJournals.com
[5] Barrons.com
[6] NaturalNews.com
[7] Business.FinancialPost.com
[8] KSPR.com
[9] Natural.News
