Biotech's Prognosis Improves at Year-End

In just a few more days, investors will be ringing in the new year. They should have something to rejoice about between now and then because the week between Christmas and New Year's Day has historically been one of the best-performing periods for stocks. In fact, since 1990, market indices have moved higher every year during this period -- the so-called Santa Claus rally. I expect this year to be no different.

No companies are expected to report earnings this week. So far, economic data have painted a picture of a slow recovery at best. However, at the end of this week, there will be some new data. And next month, companies will be releasing year-end earnings results, and investors will have an opportunity to assess the prospects for recovery. Undoubtedly, they will be holding their breath.

Going into the end of the year without a stimulus package is as much a psychological punch as a concrete financial blow. Let's face it, though -- after a 10-year economic expansion, a good thing just couldn't last forever, and it will take time for the economy to correct itself. The rejuvenation process, however, is in full swing, and that's a reason for holiday cheer.

Investors' sentiment on the biotech front continues to be bullish as news of recent acquisitions, such as Aviron(AVIR Quote - Cramer on AVIR - Stock Picks) by MedImmune(MEDI Quote - Cramer on MEDI - Stock Picks), Cor Therapeutics(CORR Quote - Cramer on CORR - Stock Picks) by Millennium(MLNM Quote - Cramer on MLNM - Stock Picks), and, more recently, Immunex(IMNX Quote - Cramer on IMNX - Stock Picks) by Amgen(AMGN Quote - Cramer on AMGN - Stock Picks), has fueled interest in biotech stocks.

Then there is Sepracor(SEPR Quote - Cramer on SEPR - Stock Picks), which helped edge biotech stock prices higher when it was announced that Clarinex, which was produced using Sepracor's technology, had been approved by the Food and Drug Administration. Clarinex, which Schering-Plough(SGP Quote - Cramer on SGP - Stock Picks) produces, is a longer-acting version of blockbuster allergy drug Claritin.

But there are other reasons for investors to feel optimistic about biotech companies.

Scientists are finding ways to improve and lengthen our lives. Several emerging areas promise to advance medical technology further, such as genomics and proteomics, and investors are looking for gains as biotech companies mature and become profitable.

In addition, big pharma is in a period in which sustaining growth is becoming more difficult. This is especially true when some major moneymaking drug patents expire or are about to. And you can bet that makers of generic drugs know when the time is ripe to come in and take away market share with cheaper versions of blockbuster drugs.

Several big pharma companies, such as Merck(MRK Quote - Cramer on MRK - Stock Picks), Pfizer(PFE Quote - Cramer on PFE - Stock Picks) and Schering-Plough, have given financial updates for the new year, some good and some not so good. This leaves investors wondering what to expect for drugmakers during an economic slowdown. As I mentioned before, drugs are always needed, whether the economy is good or bad. But it's patents, product pipeline, cash and the management team -- to name just a few factors -- that will determine a company's success.

Therefore, if you plan to invest in biotech stocks to take advantage of the sector's growth, you have to study each company. Generally, it's best to be a long-term player and to buy and hold quality stocks. Most importantly, choose a stock price for entry that represents value and upside potential.

In the past month, merger and acquisition news in the biotech sector has captured investors' interest, as investors look for places to park their money. That interest in biotech appears likely to continue into the new year.

So as we go into the last week of 2001, prepare for the worst and the best to happen in the first quarter of 2002. Until then, investors will likely give the market the benefit of the doubt and ease back into stocks, looking for growth and better returns.

Enjoy your holiday and keep your spirits up. Let's hope the market will give us reasons to cheer as we usher in the new year.