Biotechnology stocks have been performing very well since coronavirus disrupted people's lives all across the world.
Since these companies are leading the charge for potential vaccines and treatments for coronavirus, and lots of other diseases and ailments, this makes sense.
There have been many biotech companies allocating resources to finding a vaccine. The United States recently started Operation Warp Speed which selects biotech companies for federal funding to expedite the search for a cure of coronavirus.
While all of this bodes well for investors interested in buying biotech stocks, the reality is that allocating capital to the industry is the equivalent of buying multiple lottery tickets with the hope that one of them pops. Investors need to be careful if they are putting assets into this industry as it is an extremely volatile market that has huge price swings based on clinical trial results and changes in funding. For this reason, most investors should be investing small amounts of their portfolio in biotech stocks or should be trading in the short term and not planning to hold.
Some of the most popular names in the industry are Gilead (GILD), Novavax (NVAX), Moderna (MRNA), Regeneron (REGN), and Inovio (INO). These companies are some of the leading researchers for a COVID-19 vaccine or treatment. Novavax in particular has been rising lately based on news they will be receiving $1.6 billion from Operation Warp Speed. These five companies have been some of the best performers since February but have not been performing as well in recent weeks.
Those who invested in these stocks back when coronavirus was first spreading across the country have done very well but at this point it time they all pose significant risk. As the search for a vaccine continues, they will do well as long as positive news is released from clinical trials but only one or two will benefit from developing a successful vaccine.
The likely outcome from all this is one company will find a vaccine and thrive or none will find one. In either situation, the majority of these stocks will fall from where they are now as they won't be in position to profit from the vaccine.
Investors can do their research and make an informed decision on which stock is most likely to succeed in this search but it still becomes a game of gambling and trying to choose the right lottery ticket. There is money to be made in this game, but those who are looking to build a portfolio for long term growth and retirement needs should consider allocating only a small portion of their assets to any of these stocks.
One of the most-traded biotech stocks right now, Novavax, is up more than 700% since February. Most valuation metrics such as Price-to-Book and Price-to-Sales suggest that the fair trading price for NVAX is somewhere around $3.50 as opposed to the roughly $98 it is trading at right now. Inovio is in a similar state where it is trading around $24 right now and fair value is somewhere around $6. Moderna is only somewhat better as it trades around twice its fair value.
Of course all of these metrics don't incorporate market sentiment based on the search for a vaccine. These stocks are trading at a premium from their book value and sales but these valuations are obviously based on the potential of finding a vaccine and making massive profits. If any company does find a cure, the benefits are hard to imagine as the U.S. and many countries will do what they can to get every citizen a vaccine in an attempt to eradicate the virus.
Gilead is actually the one stock of five that is currently trading right around its fair value and may be a smart investment for investors of all kinds. The company is not as reliant on a COVID-19 vaccine or treatment development as the rest and the volatility is also far lower. The other stocks still remain poor choices for holding long term for many unless they are part of diverse portfolio.
There are many varying opinions on the stock market as a whole right now. Many analysts believe it to be extremely overvalued as prices are near where they were to begin the year before COVID-19 completely shut down the economy. Even before the virus, many believed markets were overvalued, but there are many smart investments to be made still. Technology and healthcare have dominated the rally since March with physical retail lagging behind.
Many investors are interested in biotech stocks as the world hopes for a vaccine to be developed, but smarter investments are likely in the tech and communication services field. Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Verizon (VZ) are almost always going to be smart and safe investments for the majority of investors. For those with more risk appetite who want to take a gamble at choosing the right biotech stock to find a cure, some of the stocks previously listed can be profitable in the short term but it is unlikely that all of them will be big winners in the long term.
The line between investing and gambling can sometimes be blurred. Those who are investing in biotech stocks need to realize they are playing a high-risk high-reward game that can be pretty close to buying lottery tickets.
