‘Momentum’ Buys Taking Biotech Into Internet Territory
It remains to be seen whether biotechnology companies ever come through with the revolutionary drugs that they promise are on the horizon.
But one thing is certain right now--their stocks are curing what ails “momentum” investors.
For the second day in a row, biotechs surged dramatically Thursday thanks to growing enthusiasm over their prospects--and a furious bout of momentum buying, particularly among gene-research-centered firms.
Stocks such as Incyte Pharmaceuticals Inc. (ticker symbol: INCY), Human Genome Sciences Inc. (HGSI), Creative BioMolecules Inc. (CBMI) and Anesta Corp. (NSTA) rocketed on huge jumps in trading volume as investors--many of them individuals--tripped over themselves to get in on the frenzy.
The danger of momentum buying, of course, is that it can turn around with no warning, especially after such an extended run.
The gains extend a rally that had carried the Nasdaq biotech index up 70% from mid-December through Tuesday. But the moves of the last two days dwarf the earlier gains, with the index bounding more than 18% on Wednesday and Thursday combined.
Many experts say the outlook for the industry is the best it’s ever been. Drugs targeting an array of maladies are in late-stage clinical trials.
But this week’s surge may be due more to so-called momentum buying, in which investors pile into stocks that have already gone up, simply on the bet that they’ll keep going up.
Indeed, analysts say a fair amount of the money flowing into biotech is coming out of Internet stocks. The Net sector overall has been flat so far this year, prompting impatient investors to search for action elsewhere.
“In this market, fewer and fewer sectors are performing well, so more and more people are coming into biotech,” said Dodge Dorland, a former Lehman Bros. investment banker now at Landor Capital, a New York-based money management and trading firm. “Biotech has a technology element and a lot of fundamental news” spurring enthusiasm.
Biotech has several things in common with Internet stocks. Few biotech companies have earnings, and a fair number lack revenue. Instead, most trade on hopes that their scientific promise will lead to a handful of blockbuster drugs.
In fact, it can be argued that the biotech mania is even more frenzied than the Internet craze. Whereas investors use Internet service providers and Web sites, few understand the arcana of human protein analysis or newfangled cancer treatments.
But “as long as it’s going up, [investors] don’t care what its name is,” said John McGinley, a market newsletter writer.
To some analysts, the biotech romp has further to go--if for no other reason than momentum has been so strong. In the last two days, the biotech index closed at or near its intraday highs, a sign that selling pressure has yet to show up.
A note of caution, however: In the past, huge jumps on enormous volume that occur after a sector already has had a lengthy rally often signal an impending sell-off. The logic is that when investors rush in blindly, the “smart money” that bought early in the move begins to take profits. As that selling accelerates, the sector begins to reverse course quickly.
However, analysts say it’s impossible to determine when that reversal might come. Biotech’s strong momentum could continue to carry the group for a while, they say.
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Biotech Frenzy
Demand for biotech shares such as Human Genome Sciences has been so huge that some of the stocks have “gapped”--that is, one day’s trading range in the shares does not even overlap the previous day’s range. Recent action in Human Genome, showing high, low and closing prices each day, and trading volume (in millions):
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Thursday
High: $231
Close: $217.56
Low: $198.50
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Source: Bloomberg News
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Wireless Act
Shares of Superconductor Technologies Inc., a Santa Barbara maker of wireless communications products, have rocketed 722% this year. Daily closes on Nasdaq:
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Thursday: $40.06, up $9.19
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Source: Bloomberg News
