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The Case For a Biotech Snapback

After a challenging year, shares of biotech companies could see rebound following tax loss selling, Bret Jensen says.

Jensen: Biotechs Hit Hard

Biotech stocks have faced a challenging year with stock prices plummeting from a lack of mergers and acquisition activity and FDA delays, but the downfall could soon be over, Real Money’s Bret Jensen argues.

Some of the sell-offs could be the result of tax loss selling or from the algorithmic trading programs. Adding these biotech stocks when they are cheap could prove to be profitable in the future, he wrote in a recent Real Money column.

“I have been incrementally adding some exposure to some of my 'losers' in 2021 during these waves down, usually via covered call orders,” Jensen wrote recently on Real Money. “I suspect once tax selling and momentum trading programs are done doing their damage, there will a substantial snap back rebound in these beaten down names.”

The sale of stocks to conduct tax loss harvesting toward the end of a year used to result in the “January Effect,” but this trend has been occurring sooner during the past several decades, he wrote.

“I wouldn't be surprised at all if this starts to occur right before or after the Thanksgiving holidays this year,” Jensen wrote. “Hopefully, it will give some hope to close out what has been a very hard year for the small biotech investor in 2021.”

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Biotech names have also been impacted by lower M&A deals and new biotechs that became public either through an IPO or SPAC drew attention away from other biotechs.

FDA decisions have not been consistent this year in its outlook on biotechs, he wrote.

“It has felt like anything from Big Pharma has gotten rubber stamped by the government agency this year regardless of merit,” Jensen wrote. “Alzheimer's drug Adhulem from Biogen  (BIIB) - Get Biogen Inc. Report being the poster child for this.”

Smaller biotechs such as Agenus  (AGEN) - Get Agenus Inc. Report, Eyenovia   (EYEN) - Get Eyenovia, Inc. Report and Omeros   (OMER) - Get Omeros Corporation Report   have faced delays or denials from the FDA for their marketing applications for “picayune, vague, illogical and/or head scratching reasons in 2021,” he wrote. “This usually happens just before the scheduled decision date after many months of the FDA sitting on these NDAs with no action.”

A turnaround in these stock prices could be a slow process, Jensen argues.

“Unfortunately, things are likely to get worse before they get better,” he wrote. “Given so many small biotech stocks are deeply underwater in 2021, tax loss selling is likely to be a much bigger headwind than normal as we close out 2021 as well.”

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