Monthly Archives: June 2015

Biotech Blowoff + Solar Stocks

This year has been a tough year in general…certainly not one of those +170% years I got lucky enough to experience over the past 6 years. I’ve reserved myself to this possibility from the start of the year, trying my best to keep myself from taking too many risks. The downside to this is that if I’m wrong and we have a tremendous run from here, then I will be missing out on significant upside gains. But having been on such a good run, the goal now is to preserve as much of those gains as possible and still participate in the upside somehow.

Lately I’ve been eying up the potential for a substantial correction in biotech stocks in the fall, thinking that they might have one last run in them…a potential blowoff top coming in the late summer. First, its important to realize that nailing down the timing of blowoff tops is nearly impossible (and spending a significant amount of time watching the overall market is oftentimes just a waste of time…you’re usually better suited searching for cheap individual stocks). Just ask all of the people shorting the Nasdaq in the fall of 1999 (although I was still in college then I’ve read that there were plenty of skeptics then and the bull market just bulldozed over them) as it rallied almost 100% in the last 6 months of that epic bull market.

The Biotech sector has been on a similar epic bull run. Below are the returns for $IBB, an exchange traded fund (ETF) for the biotech index, over the past several years:

Screen Shot 2015-06-11 at 10.13.16 PM

As you can see, it has generated returns of 418.06% from the close of 12/31/08 to 6/11/15 and 523.73% from the lows on 3/9/09.

By comparison, the only bubble I can find that is close in terms of total returns is the 1995-1999 Nasdaq bubble, which generated returns of 441.21% over that time period. This bubble occurred over a shorter time period (5 years vs 6.5 years for Biotechs) so the resulting crash was most likely more severe than what we should inevitably see with biotechs – i.e., violent rallies often end in violent corrections. Returns for the Nasdaq during that time period are listed below (I included the subsequent 3 years to see what the bubble resulted in):

Screen Shot 2015-06-11 at 10.16.53 PM

In addition to this similarity, I’ve been casually watching the similarity in chart patterns of the current biotech bubble with the 1987 stock market, another stock market bubble. The early 1980’s bull market was an impressive bull market as well, with the S&P 500 seeing a roughly 240% rise from August 1982 lows to the peak in August 1987. Take a look at these chart similarities (the chart on the left only takes into account trading through mid May 2015 for the Biotech ETF (Symbol: $IBB). Biotechs has since risen from $355 to $368 over the past 3 weeks.). They actually line up fairly close, with biotechs currently on the verge of breaking out to new highs after a mini blowoff top in March, much like the S&P 500 did in June 1987 after a mini blowoff top in March of that year. See the charts below:
Screen Shot 2015-06-11 at 10.24.57 PM

Given how most market or sector meltdowns tend to occur around September/October, I’ll be on the lookout for a potential blowoff top in biotechs sometime in July or August, then a meager attempt to rally back to the highs, with a subsequent meaningful (20%+) drop in the biotech sector. If this does transform, I’ll be looking to buy BIS heading into July/August.

If this was to happen, I’m not sure what impact this will have on the overall market. My suspicion is we might see a 10 to 15% drop. But whatever transpires, I will be looking to substantially reduce my risk heading into next month. Having said that, I do really like one sector which I plan to write about more in the future: solar.  I haven’t yet taken positions in this space but I’m hoping to do so on a market pullback.

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What Works in the Stock Market

This is going to be another ongoing post that I will add to…

What Has Worked in Investing

I came across a couple of articles on what has historically worked when it comes to investing in the stock market…which investment methods generated the highest returns.  It’s pretty well known that smaller companies (ie small capitalization (small cap) companies) tend to outperform larger companies.  That makes sense.  But here’s some concrete evidence from Tweedy, Browne to support this:

What Has Worked in Investing by Tweedy, Browne Company LLC
What Has Worked in Investing is an attempt to share with you our knowledge of historically successful investment characteristics and approaches. Included in this booklet are descriptions of over 50 studies, approximately half of which relate to non-U.S. stocks.  Our choice of studies has not been selective; we merely included most of the major studies we have seen through the years.”

Catching Fall Knives

Another article I came across is a study done by The Brandes Institute that looks at the 3-year returns from an investing strategy centered around catching falling knives.  Falling knives, in this case, are stocks that have dropped 60% or more from high to low.  This article looks at a few things: domestic (U.S.) vs international falling knives; falling knives by sector.

Falling Knives Around the World by The Brandes Institute

“In “Buying the Wrong Stock for the Right Reason”, we examined the performance of falling knives in the U.S. stock market from 1986 through 2002. While the falling knives we identified did post a relatively high bankruptcy rate over the three-year period following their initial drop, they also outperformed the S&P 500 by wide margins.”…

Inspiring Quotes from Business Leaders

Every once in a while I come across quotes from business leaders or provocative thinkers that inspire me to do more.  I figured I would start compiling a list of quotes I come across and stash it away on this blog so I can reference it in the future if I’m in need of some inspiration.

Last night I was reading a great article on Sergio Marchionne, the CEO of Fiat Chrysler ($FCAU), a stock I owned for a little while and one I’m still contemplating buying ahead of the upcoming Ferrari IPO.  Sergio is a tremendously hard worker, reportedly putting in 100 hour work weeks.  He’s also well educated and speaks fluent Italian and English.  He’s a chain smoker and coffee drinker whose work ethic and lifestyle will probably put him in a coffin early.  But the best part of him is his blunt honesty.  His background isn’t in the auto industry which allows him to think more outside of the box than others in the industry yet also puts him at odds with a lot of people.

The New York Times wrote an article about him recently and part of it quoted his philosophy on how he runs FCA:

“I’ve always had this incredible sense of urgency,” he said. “I’ve always had this desire not to let things fester and to really seize the moment, because it’s serendipity.”

He paused. “You create the conditions for it, and it just keeps producing outcomes or opportunities for you to pick,” he said. “And if you don’t pick them, then it’s your own damn fault.”

Awesome stuff.