In this market, survival first is the name of the game

Monday, 7-April-2014

After Friday’s carnage where the Nasdaq Biotechnology Index, which was already in a bad slump, lost a whopping 4 percent, a lot of people have been asking me which stocks are a good buy right now?  Frankly, in a market that looks as challenged as this one, I think the question of what to buy is putting the cart before the horse. My advice is that you should first be focused on making sure you are positioned to simply survive whatever is in store because things can get a lot worse.

 

I’m not going to pretend to say I know where the overall market, or even just the biotech sector, is headed over the near-term.  However, what I can say with certainty is that Friday’s sell-off felt a lot different than some of the other ones we’ve had during the last few years.  Watching the tape, it seemed like there was a lot of forced selling going on that day.  Leverage has been an investor’s best friend over the last few years, but maybe Friday was a sign that those days are coming to an end.

 

If Friday was the start of something real, it is important that investors focus on survival first before worrying about things like what to buy.  A market where are you are seeing forced selling can be particularly nasty for a couple reasons.  First, by definition, many of those investors are selling regardless of price.  If you think you spotted cheap stocks on Friday, rest assured prices can get downright silly if this keeps up.  Second, this is the perfect recipe for an extended slump because forced sellers will feel burned and are unlikely to revisit the sector anytime soon.  Make sure you are financially positioned to get through something like that.

 

While I am not saying those things are definitely going to happen, I am sufficiently concerned enough to say you should absolutely be prepared in case they do.  My advice first and foremost is to stay off any type of leverage in your own portfolio.  You do not want to be a member of the forced selling crowd, so be very careful about holding any margin at all.  If you have some, at a minimum dial it back.  I would also be very careful about trading options with near-term expirations.  It might feel like we are due for a rebound, but this slump started less than two months ago. That’s nothing in the grand scheme of a real bear market.

 

Another thing I’ve personally been doing a lot of lately is going over my portfolio position-by-position and asking myself if each company is 1) truly worth owning and 2) capable of making it through bad times.  During bull markets, it is easy to let a few slip in that don’t meet those criteria.  The types of companies I personally do want to own in this environment are ones that have approved products, real revenue, and legitimate pipelines behind them.

 

Regeneron (Nasdaq: REGN) would be a good example. I know the stock has been the ultimate high-flyer and will be punished quite a lot in a bear market scenario, but that company is here to stay.  I’m certain they are going to have bright future no matter what the near-term looks like.  Consider the way Chris Viehbacher over at Sanofi (NYSE: SNY) has been buying the stock lately.  He already owns nearly 20% of Regeneron, and bought another 1.4M shares over the last two weeks at prices ranging from $298.41-$333.00 each.  In his position, he is the ultimate long-term investor and I’m sure could care less about timing the market.  Sanofi buying nearly $500M at those prices is the type of lead I want to follow as an investor.  For what it is worth, there are a handful of other companies where a long-term partner has recently purchased stock at higher prices.  Those include Acceleron, Alnylam, Five Prime, and Epizyme.

 

In terms of which ones to drop, I’d stay away from the gimmicks and story stocks.  I hate to pick on Sangamo (Nasdaq: SGMO), but it is one company I have been bearish about for a quite a while.  While they have some interesting technology, I challenge any Sangamo bull to give me a prediction about what specific date they will have an approved product in the future?  That’s an important question to consider in any environment, but if you can’t answer it while potentially headed into a bear market, you are playing with fire.  It is perfectly okay to own speculative, research-oriented names, but I would focus on ones that have a defined path to market approval (or other inflection point).  The only hope an individual stock has of bucking a nasty bear market is reaching a fundamentally-based inflection point, so you should be able to define what that is and be prepared to ride out the storm until it happens.

 

I’ll conclude by saying I hope all of this talk about caution turns out to be a false alarm.  Maybe the market will bounce on Monday and eventually head back to new highs.  That would be great.  Even if it does though, it wouldn’t change the fact that we should all be prepared for some rainy days ahead just in case.  I have no doubt the biotechnology sector is in for great things over the long-term.  To be clear, I am still fully invested (to the extent that I have no margin and all the cash I need over the medium-term) and plan to stay that way for a very long time. However, if you want to be around to reap future gains, you have to be prepared to make it through some nasty volatility in the meantime.  In this market, survival is the name of the game.  Good luck!

Who Am I?

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

More on the web
Follow Me
  • Twitter App Icon
  • Stocktwits.jpg
  • YouTube Classic
  • Google+ Classic