It’s been a great year for the overall market. The Nasdaq Composite (NASDAQINDEX: ^IXIC) is up a healthy 18% since the end of 2020, and is seemingly still going strong.
Not every Nasdaq-listed name, however, is participating in this rally despite the exchange’s affinity for high-growth technology names. In fact, more than half of the Nasdaq’s stocks are actually down year to date, even if only by a little. Of course, this spotty weakness has some bargain-hungry investors licking their chops.
Before plowing into one of these beaten-down tickers just because it’s been beaten down, though, it might be wise to take a step back and look at the bigger picture.
Down, and maybe even out
Don’t sweat the fact that the majority of Nasdaq-listed stocks are in the red through 2021 thus far. A bunch of those tickers are small-caps and micro-caps, which can often be expected to underperform en route to bankruptcy and/or a delisting. Limiting the look to the Nasdaq’s mid-caps and bigger (market caps of more than $2 billion) dramatically improves the number of tickers that are up year to date. And, even among those remaining laggards, there are several one-off train wrecks most investors likely saw coming.
For instance, shares of ContextLogic (NASDAQ: WISH) (you know it as online shopping website wish.com) are down 82% since last December’s public offering, as investors increasingly ignore the early hype surrounding that IPO and turn their focus on reality-rooted concerns regarding its actual growth prospects. It’s an all-too-common tale. Meanwhile, while fitness equipment made by Peloton Interactive (NASDAQ: PTON) was all the rage when the pandemic was in full swing last year, the contagion’s containment this year has deflated demand for its stock. Its shares are off 71% year to date.
Beyond ContextLogic’s and Peloton’s implosions, though, there are several identifiable themes among the Nasdaq’s biggest 2021 losers to date.
One of those themes is extreme weakness among Chinese stocks, and Chinese technology stocks in particular. As of Monday, Chindata (NASDAQ: CD), iQIYI (NASDAQ: IQ), Pinduoduo (NASDAQ: PDD), and Kingsoft Cloud (NASDAQ: KC) were all down by more than 60% since the end of 2020.
Some of the weakness can be attributed to business-related headwinds, not the least of which are tougher comps created by a surge in business in the midst of last year’s pandemic-prompted lockdowns. Mostly, though, blame China’s ride-hailing company DiDi Global (NYSE: DIDI). DiDi ran afoul of several of China’s regulatory agencies when it sought a public listing on a U.S. exchange in June, defying Beijing’s scrutiny of the company underway at the time.
The decision reaccelerated a months-long crackdown of China’s leading technology companies, ultimately leading to the recently planned delisting of DiDi Global’s NYSE listing and relisting at a Hong Kong exchange. Some observers suggest DiDi’s decision could be mirrored by other Chinese companies with U.S.-listed stocks, cutting off a key source of funding as well as a big source of demand for their shares. These stocks are simply trapped by uncertainty in the meantime.
Several of the Nasdaq’s biotechnology listings have also lost an inordinate amount of their value this year. As of Monday, Editas Medicine (NASDAQ: EDIT), Acadia Pharmaceuticals (NASDAQ: ACAD), AbCellera Biologics (NASDAQ: ABCL), and TG Therapeutics (NASDAQ: TGTX) are down by 60%, 65%, 65%, and 70% (respectively) since the end of 2020.
The reasons for these steep sell-offs are as varied as the four companies in question. In all four cases, though, the sell-offs are ultimately rooted in worries that these biopharma companies’ flagship in-development drugs aren’t apt to live up to once-lofty expectations.
TG Therapeutics’ cancer-fighting umbralisib, for example, is scheduled to be scrutinized by the U.S. Food and Drug Administration (FDA)’s Oncologic Drugs Advisory Committee (or ODAC) before the agency makes a final decision on the therapy. The usually unnecessary step doesn’t preclude the possibility of an eventual approval, but it does cast a shadow of doubt on the FDA’s opinion of the drug’s safety.
Finally, while a slew of biotech stocks are well into the red this year, several non-biotech Nasdaq-listed healthcare stocks are also deep in the hole. Shares of healthcare plan provider Clover Health Investments (NASDAQ: CLOV) are off by 74% as of early December. Health clinic chain 1Life Healthcare (NASDAQ: ONEM) and telehealth platform LifeStance (NASDAQ: LFST) are down 64% and 60%.
These particular plunges aren’t tough to explain. Telehealth visits facilitated by LifeStance last year, for example, aren’t quite as necessary now that COVID-19 vaccines are making a dent in the pandemic. Clover Health shares are down big-time, but much like ContextLogic, this stock is suffering the post-IPO blues stemming from its well-hyped debut via a special purpose acquisition company (or SPAC) merger completed in January.
1Life Healthcare shares are down so much mostly because it was up so much in 2020, also whipped around by the unusual circumstances created by the coronavirus pandemic. The thing is, those unusual circumstances are why you should view all of these losses (along with the healthcare sector’s overall 2021 weakness) as one bigger-picture trend.
Buy, sell, or hold?
So now what? Are these drubbings an opportunity, or a warning? As always, it depends.
The broad weakness from the healthcare sector is indeed a buying opportunity. Investors have sought out other sectors at the expense of healthcare stocks over the course of the past several months. All sectors constantly fall in and out of favor, though, so shopping for a new name from this group is a smart idea at this time.
Just be picky when making those selections, as none of the four aforementioned Nasdaq-listed biotech stocks are worth the risk here. That’s not to suggest these tickers can’t rebound. It’s simply to say their recent weakness is a warning of sorts that shouldn’t be ignored. It’s not unusual for developmental biotech names to crash and burn, having never really become what many investors hoped they might.
As for all the Nasdaq’s Chinese stocks, the four in question here (along with most of the others not discussed) are indeed hands-off until further notice. Although not every one of them is destined for a delisting, every one of them is at serious risk of being scrutinized into submission by China’s regulators. Without even having an inkling of what their future holds, the smart decision is simply steering clear if you’re not in any of these names right now.
The possibility that the broad market itself could soon be bumping into an economic headwind, of course, only makes most of these laggards even less ownable here.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Editas Medicine and Peloton Interactive. The Motley Fool recommends AbCellera Biologics Inc., TG Therapeutics, and iQiyi. The Motley Fool has a disclosure policy.