BST Market Update: October 10, 2014

October 10, 2014

Investing in developmental stage biotech stocks often feels like we’re mining for diamonds. We have to dig through tons of worthless dirt to find the few jewels that make it worth the effort.

There’s no denying the rewards of biotech investing are unlike anything else when we find one of these diamonds.  But it’s been more difficult than usual to find these small-cap biotech diamonds lately.

In fact, it’s been as bad a run for developmental stage biotech stocks as I’ve ever seen.

Consider this… biotech stocks with a market cap under $500 million are collectively down 20% over the last three months!  Only 12% of small cap biotech stocks that trade on a major exchange are positive over the last three months.

And only one stock out of hundreds of developmental stage biotech stocks is at a new 52-week high right now.  At the same time, there are 27 biotech stocks making new 52-week lows.

To make matters worse, the one area of biotech that has been hot are the stocks that have potential treatments for Ebola.  But after looking into these companies, there’s no way I would recommend these stocks.

Don’t be fooled, these stocks are being manipulated. Someone out there is shorting these stocks as they move higher.  They’re just waiting to unleash their stream of negative news on these stocks.  And they will get crushed.

In short, the last three months have been brutal for biotech. 

There’s been the usual list of poor clinical trial results, negative FDA rulings, and management teams overhyping scientific achievements that can play havoc with a biotech stock.

But there’s been something more than that.

Fear of a major correction has overwhelmed investors.  And that fear is driving investors out of speculative stocks like developmental stage biotech stocks.

In other words, this has been a good old fashioned biotech sector correction. 

The volatility from a broad biotech correction can be hard to handle.  It’s never fun to look at your promising biotech stock that hasn’t reported good or bad news and see it down 5%, 10%, or even 30%.

But as an investor that’s looking to a specific catalyst to propel the stock higher, you just have to ignore these periods of weakness.  Or better yet, use the lower prices as a buying opportunity.

As long as there hasn’t been an event that has changed our opinion on the stock, the drop in price is a great opportunity to pick of more shares of stocks you already own at a discount.

Buying more shares at a lower price reduces your cost basis and can significantly increase your potential profits when our catalyst triggers a move to the upside.

It’s also a great time to initiate new long term positions.

You have to understand that there’s no way to know when the tide of investor sentiment toward developmental stage biotech will turn.

We could see selling pressure persist for days or weeks.  But trust me… it will turn.  And when it does, we’ll look back at this period as one of the best buying opportunities we’ve seen in the last few years.

If you bail out on biotech stocks now for no good reason, you’ll be just like every other undisciplined investor that gives into their emotions.

This type of emotional selling is the undoing of most people.  And the reason why most people will never reap the wealth building rewards biotech stocks can deliver.

Now more than ever, it’s essential to control your emotions.  And see the biotech sector correction for what it is… a great buying opportunity.

Category: BST Update