— In a little over a year the market has gone from sell ‘old economy’, companies that make something and earn money,  to sell companies that don’t make things and earn money.

— We are now at the stage where nobody cares … don’t buy anything whether it makes makes ‘things’ or money. Irrational pessimism on the tech/innovator sector has morphed into a panic where everything is being sold. Yet the economic statistics remain vibrant.

— The risk-off market has played havoc with the biotechs where the fundamentals have not changed as much as the valuation. I provide a few interesting names…larger cap and babies being thrown out with the bathwater.

Prologue

Back in the spring of 2020, the Nasdaq Composite was trading at 9314.91, about to make a nearly 7000 point run to a new all-time high (11/22/2021) of 16212.23. Nasdaq was where all the bright and shiny innovation stocks resided. The buyers didn’t care what they paid (in a zero-interest-rate environment) for the new and shiny. They knew that these companies were an antidote for the Covid blahs. They just bought it. This was an obvious bubble in a narrow but important sector of the market. 

That peak in the Nasdaq marked the reversal of the Covid trade. In the face of a much improved economy, rising inflation, the removal of emergency programs (QE) designed to bolster the economy during the pandemic, and higher/more normal interest rates the tech/innovation-at-any-price trade has been skewered. NONE OF THIS SHOULD BE SURPRISING, NOR SHOULD IT STRIKE FEAR IN THE HEARTS OF INVESTORS. It also should be priced into the market by now.

Companies that make things and make money get torched

This idea worked pretty well up until recently. High multiple, bet-on-the-come stocks have been crushed. But now with the elevated concern over a potential higher-interest-rate-driven recession (a very normal and to-be-expected phenomenon) panic has set in. Everything is for sale. I am not sure why. Maybe it’s investors paying too much heed to the financial media’s hair-on-fire perspective or the political media that never fails to find a dark cloud in every silver lining. It would appear, looking at April’s employment statistics, business is not afraid:

“Total nonfarm payroll employment increased by 428,000 in April, and the unemployment rate was unchanged at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread, led by gains in leisure and hospitality, in manufacturing, and in transportation and warehousing” (Bureau of Labor statistics).

Another part of the panic maybe algorithmic computerized trading that can trigger major sell or buy programs on a headline. This is exacerbated by the “ETF-ization” of the market. With an ETF you can control a basket of a large number of diverse securities or securities in a specific sector. With a push of a button you can liquidate that position. If there are no buyers on the other side of the trade the ETF sponsor will liquidate the underlying stocks into the market. In a no-bid or small-bid market the effects can be disastrous, causing big price moves with no fundamental justification. I believe that this a significant cause of the market’s current weakness.

Biotech on the critical list should it be?

Biotech, especially small-cap biotech, appears to be the potential dead duck in this market decline … “Abandon all hope ye who enter here” (according to Dante in the inscription on the gates of Hell). Even companies that make things and earn money like BioNTech SE (BNTX-$140.32) and Moderna (MRNA-$135.80) are down over 70% off their August 2021 peaks. In a world of trillion-dollar companies both are tiny …MRNA $53 billion mkt. cap. with $22.6 billion in trailing twelve-month revenues and BNTX $33 bil. mkt. cap. with $20 Bil. TTM revenues. This is a far cry from Tesla with its $$790 billion market cap producing $62 billion in revenues. Either we should be taking another look at these names or we are about to enter a no-booster, no pandemic (no new virus) world where the needs for all the potential other applications of messenger RNA technology will not be required.

This has been a broad decline with the Ishares biotech ETF (IBB–$107.28 down 40% from its 8/21/20 and the smaller-cap-focused  S&P biotech ETF (XBI –64.37 down 60% from its 2 /21 high). 

The real dead ducks appear to be small/micro cap biotech

Many of these companies, because of size and financing issues, have been driven to sub $5 prices (some to sub $2). The last few months have been ‘risk off’ big time and biotech is a risky space. In order to finance many of the lower-priced biotech companies will have to reverse split, which is another red flag. After reverse splits investors who might own a thousand shares of a $1 stock could end up with 100 shares of the new float and out of frustration sell. Not only that but going into the split there will be selling for the same reason. Nonetheless, the companies with interesting science and some element of proof of concept will get financing. 

Although it is hard to compare the oil exploration and production companies to biotech entities, I might point out that issues and questions about financing and viability were central to investor concerns in the Spring of 2020 and this created a huge buying opportunity.

Biotech babes being thrown out with the bathwater

Let me give you a few examples from the speculative quarter of my own portfolio. Again, mind you these are very speculative … not for the faint of heart or pocketbook.

Enlivex (ENLV — $4.14, 52 week range $3.65 -$13.95)

Enlivex is an Israeli company with a great pedigree out of Israel’s main research and teaching hospital, Hadassah Medical Center. The total value of this company in today’s market is $76 million, which happens to almost equal their cash in the bank. They need no financing as the company believes that their cash horde should easily get them to mid-2024. They have no debt. The company’s product, Allocetra, is designed to bring a rampaging immune system, such as that found in sepsis, back to homeostasis (normal) without suppressing that immune system. they have had good success in small trials on sepsis and severe-to-critical cases of Covid 19 pneumonia.

“In 2021, Enlivex initiated a placebo-controlled, randomized, dose-finding, multi-center, Phase II trial evaluating liquid Allocetra™ in patients with pneumonia-associated sepsis.” Preliminary results on liquid Allocetra are due by the end of the first half of this year. The company has research partnerships with Yale University Cancer Center and Mount Sinai Medical Center.

Alaunos Therapeutics, Inc (TCRT–$0.69, 52-week range 0.40-$3.73)

Wells Fargo just upgraded this sub-$1 stock to outperform. This is unprecedented. Seldom do you see any major firm recommend a stock trading under $10 per share. On top of this the company appears to be running low on cash. Cynics will say it is Wells trying to buy the business when the company does come to market. I would counter-why take the reputational risk for a $100 or $200 million equity deal It is not worth it.

Even more stunning is the reason given for the upgrade:

“We are upgrading shares of TCRT from EW to OW following the recent announcement a patient has been dosed in the solid tumor trial of autologous T cell therapy targeting a validated neoantigen TCR-HLA pair.”

I’m not certain whether this is a baby or bathwater but Wells Fargo going out on a limb like this has to make you think it to be an abandoned baby.

Biotech in general may be the abandoned baby.