If you're like many other investors, your search for bargain stocks starts with names that have been severely sold off. As well it should. The market is capable of going to extremes at times, devaluing names only to revalue them again just a short time later. You know the practice by its more familiar name, “buying the dip.” The bigger the dip, the better the bargain.
As veteran investors can attest, however, a stock that's been up-ended isn't inherently a stock that's ready for a recovery. Sometimes, a steep sell-off is exactly what's implied.
It's the dilemma anyone looking at this year's biggest losers among Nasdaq-listed stocks is facing, as usual. This time around though, there's an additional curious nuance. Most of these losers are in the exact same industry, and have been crushed for the exact same reasons.
One too many headwinds
For the record, excluding always-volatile small caps and micro caps, the five biggest losers on the Nasdag this year are (with losses respectively ranging from -65% to -56%) Poshmark, Acadia Pharmaceuticals (NASDAQ: ACAD), AbCellera Biologics (NASDAQ: ABCL), Arrival, and Amicus Therapeutics (NASDAQ: FOLD).
It's difficult to ignore that biotech stocks feature prominently among these most severe laggards.
And this theme only solidifies as you look deeper into 2021's worst-to-date performers among the Nasdaq's larger listings. Biotech names Sarepta Therapeutics (NASDAQ: SRPT) and TG Therapeutics (NASDAQ: TGTX) claim the sixth and seventh spots from the bottom, down 54% and 53% so far this year.
Can there be a rebound for biotech stocks?
It's a detail worth noting as odds are good that any recovery any of them manage to make from here is likely going to be part of a groupwide rebound. Such a rebound won't be particularly easy to come by, however, for a handful of reasons.
Chief among reasons it will be hard to recover is sheer circumstance.
Vaccine race: You may recall a bunch of biotech stocks logged stellar performance around the middle of last year, shortly after the COVID-19 contagion turned into a global pandemic. The world didn't know which player would come up with a vaccine or treatment (or even a test) first, so investors simply made bets on a variety of names in the business… including many of the ones listed above. Once Pfizer, Moderna, and Johnson & Johnson essentially won that race though, investors lost the will to stick with other entries.
The dynamic has been particularly painful for shareholders of AbCellera Biologics, which just went public in December, seemingly to capitalize on the vaccine mania that had already peaked. Its shares are now below their IPO price of $17, and well below the stock's December peak near $72.
Recent FTC stance on pharmaceutical mergers: That's not the only thing working against the industry, however, and smaller biotech names in particular. Much of the entire sector's recent weakness also coincides with the Federal Trade Commission's (FTC) creation of a global task force assembled in March to “build a new approach to pharmaceutical mergers.”
It's not clear how much authority this working group will wield. But, in that the announcement made a point of mentioning “skyrocketing drug prices and ongoing concerns about anticompetitive conduct in the industry,” it is clear there's a brewing risk to the entire business of drug development.
It's also worth mentioning that more than a few biotech start-ups are tacitly hoping to get bought out at their inception, with investors quietly hoping for the same. This is going to be a more difficult, less rewarding prospect if the FTC-led efforts are effective.
Legislative changes and regulations: Then there's the even-more philosophical argument that the entire industry is on the verge of running back into the legislative and regulatory buzz saw.
It's a recurring story. The business usually emerges from such scrutiny unscathed. Indeed, the fact that not many people balked at the $56,000 price tag for Biogen‘s (NASDAQ: BIIB) recently approved Alzheimer's drug Aduhelm tacitly says drugmakers remain completely in control of their pricing policies… even prices charged to Medicare.
With a new presidential administration in place, though, proposed legislation like the bills Senator Bernie Sanders and other Democrats unveiled in March — aimed at lowering drug prices for the government as well as for individuals — are given another fighting chance.
Sooner or later, one of these will slip through. And then another. And then another. It's a risk to many smaller biotech developers, which frequently count on high prices for relatively unique therapies.
To buy, or not to buy?
Fine, but don't these huge pullbacks still make these particular biotech names compelling prospects despite all their challenges?
To be fair, there's nothing about any cost-curbing prospect or a now-meaningless coronavirus vaccine race that supersedes any of these aforementioned companies' stories. And in the world of biotech, stories about a drug's potential readily substitute for sales and earnings.
Identifying winning drug developments and looking past misguided research and development is still a key part of the biotech investing game. As of right now, however, the collective overhang is just too much for even the very best biotech stories to break through.
Some breakthroughs will happen, mind you. We just don't know which names will be the ones best positioned to overcome the headwind and adequately reward shareholders for the risk being taken. It's a headwind that could blow for a few more weeks, if not a few more months.
The bigger takeaway: Always keep tabs on the market environment and its key themes.
10 stocks we like better than AbCellera Biologics Inc.
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and AbCellera Biologics Inc. wasn't one of them! That's right — they think these 10 stocks are even better buys.
*Stock Advisor returns as of August 9, 2021
James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Poshmark, Inc. The Motley Fool recommends AbCellera Biologics Inc., Biogen, Johnson & Johnson, Moderna Inc., and TG Therapeutics. The Motley Fool has a disclosure policy.