Even after a big drop such as we saw yesterday, it is hard to look at the current situation and believe anything other than that we have seen the low on this move down and will, at some point, start to bounce back. Nothing really has happened over the last month or so to justify a drop of this magnitude, only the market’s attitude and perception has changed.
We have known about the potential for disaster inherent in trade wars for some time and the Fed has been telling us for a while that they will be instituting regular, small rate hikes. For context, by the time stocks had fallen this far in 2008, we already had full-blown crises in the housing market and banking and GDP growth had been negative for a couple of quarters, indicating that those problems were spilling over into the broader economy.
By contrast, what is driving this drop is not an actual problem, but fear that there might be one in the future. That is not unusual, but the stock market has a terrible record of predicting real problems, so the odds are that we will bounce back before too long. If you understand and accept that, the obvious questions become when will it do so and what should you buy to take advantage of it when it does?
The first, I’m sorry to say, is unanswerable. Panic may be illogical, but it is powerful nonetheless. Obviously, if we have fallen as far on nothing as we did on hard data indicating an impending recession a decade ago, this is not a move based on logic. It is, therefore, reasonable to assume that the turnaround will not be logical either and predicting an essentially random event is impossible.
That is a useful, if somewhat frustrating observation, but it, along with what has been hardest hit on the way down, should be what informs the decision as to what to buy.
This decline is about fear, and one of the hallmarks of a fear-driven move is de-risking. Assuming this isn’t the time when the market’s fears are justified, it will be assets considered risky that bounce back the quickest, so that is the place to look, and what could seem more risky than a young, recently IPO’d biotech company such as PhaseBio (PHAS)?
One would think that was the case, but is PHAS really that risky in the current environment? The stock was initially offered at $5 just under a month ago and has since ranged between $6 and yesterday’s low of $4.72. That is a roughly thirty percent range, which is not that bad given the gyrations of the broader market. In addition, the fear right now is that economic growth will be slower than expected, and even if that come about it will have no impact on a specialized drug or drugs.
PhaseBio specializes in drugs to treat cardiopulmonary disease, specifically pulmonary arterial hypertension (PAH). Their main asset, with the catchy name of PB2452, is in early-stage development, but results so far have been good in terms of both safety and efficacy. More importantly in many ways, PHAS has a proprietary platform that regulates the rate of release of their therapies, so there are long-term prospects for other developments.
Of course, any novel therapy entering phase 2 trials has attendant risk, but the current risk off environment has led to an exaggerated pricing in of that risk. That leaves a big upside. Stifel, who initiated coverage of the stock yesterday, did so with a target price of $14 for example.
It may seem crazy to identify this as a time of fear in the market when risk is being punished, and then go looking for a risky stock to buy. In this case however, it makes perfect sense. The risk that is dominating traders’ thinking is not one that would adversely affect this stock, but it is being held back anyway, which skews the risk/reward ratio massively in your favor. That is what I look for in any trade, but when it is accompanied by a broad market drop that looks overdone, PHAS looks like a good way to play an expected bounce back.