Image credit: Genetically modified Amflora cells, BASF, flickr Creative Commons
By Jason Zweig
11:17 am ET Mar. 27, 2015
In a research note out today, Credit Suisse analysts Ravi Mehrotra, Jason Kantor, Anuj Shah and Jeremiah Shepard write that biotechnology stocks are not in a bubble but “rather in a new era,” evolving from “Biotech 1.0 to Biotech 2.0.”
On Twitter, the note was quickly mocked for implying that “this time it’s different,” the expression that the late investor Sir John Templeton said constitutes the four most dangerous words in the English language.
Credit Suisse had no immediate comment.
My colleague Gregory Zuckerman noted earlier this week that many investors are worried that biotech stocks have gotten overheated, and the iShares NASDAQ Biotechnology Index exchange-traded fund is off 9% over the past five days.
Against that backdrop, the Credit Suisse analysts insist that biotech is moving toward what they call a “Nirvana Model” of “unprecedented growth and profitability.”
This “new era” talk reminds me of the immortal words of Benjamin Graham in the first edition of the book Security Analysis in 1934. Graham (with his co-author David Dodd) was writing in the wake of the Crash of 1929, after investors had driven stocks to unsustainably high prices on the belief that corporate profits could grow indefinitely. The passage is so profound and impeccably written, it’s worth quoting at length:
…particularly during the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks…. The new theory or principle may be summed up in the sentence: “The value of a common stock depends entirely upon what it will earn in the future.”
…[such beliefs] concealed two theoretical weaknesses which could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinction between investment and speculation. The second was that they ignored the price of a stock in determining whether it was a desirable purchase.
The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. yet the new-era theory led directly to this thesis…. Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price. Hence all upper limits disappeared, not only upon the price at which a stock could sell, but even upon the price at which it would deserve to sell. This fantastic reasoning actually led to the purchase for investment at $100 per share of common stocks earning $2.50 per share. The identical reasoning would support the purchase of these same shares at $200, at $1,000, or at any conceivable price.
An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy “good” stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic. Countless people asked themselves, “Why work for a living when a fortune can be made in Wall Street without working?” The ensuing migration from business into the financial district resembled the famous gold rush to the Klondike, with the not unimportant difference that there really was gold in the Klondike.
Anyone who buys biotech stocks to participate in a “new era” should take Graham’s words to heart. The idea of a new era is old as the hills, and it almost always ends badly.
Source: WSJ.com, Total Return blog