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TheStreet Open House

Biotech's Longer Convalescence

Survey Says

I conducted an informal and unscientific sentiment poll of more than two dozen biotech money managers, traders and buy-side research analysts. A clear majority of respondents agree the biotech sector is in a deep hole and will be unable to finish 2004 up for the year. (Certainly the sector has little chance of matching or besting its performance in 2003 when the Amex Biotech Index closed 2003 at 490, up 45%, and the Nasdaq Biotech Index closed 2003 at 724, up 47%.)

But these biotech mavens are more optimistic when it comes to forecasting the performance of the sector from current levels. A clear majority believes the sector will finish the year higher than Monday's close. It's important to note, however, that many of those same respondents feel things could get worse before they get better -- which means the sector may not have put in its bottom just yet.

Of course, moving biotech stocks higher will require getting a wider circle of investors -- and not just these dozen-plus specialists -- to start buying. Wayne Rothbaum, a hedge fund manager with Quogue Capital, doesn't necessarily see that happening any time soon.

"What props up the biotech group is when momentum guys, the big aggressive growth funds and market-timers want to get into the sector. But now, these guys have been selling stocks as fast, or faster, than they were buying them," he said. "And price deflation is worse now because there is no buying support."

Biotechs also will have to overcome the impression that valuations are still not cheap, by historical standards. While companies generally met or exceeded earnings expectations for the second quarter, they did not significantly raise EPS forecasts. And in a bear market, especially one accompanied by the threat of rising interest rates, valuation multiples are typically compressed.

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