Don't Overreact to the Volatility in Moderna (MRNA)

When a stock loses more than half its value in three months or so, it is only natural to assume that the company has a major problem. That isn’t always the case, however. Sometimes it is the analysts, traders and investors that make up the market that are the problem. That is the case with Moderna (MRNA), a stock has shown huge losses in each of the last two trading days but which, as it drops further, becomes more and more of a solid long-term investment. The stories on successive days that caused the drop were bad news, of course, but the size of the reaction was caused by them coming altogether in a bunch, and by what had come before.

Within just a few days, we learned that Moderna had missed on earnings and reduced forward guidance, that rival Pfizer (PFE) had increased their share of the Covid-19 market to seventy percent, that PFE had also received authorization for a therapy to be taken after contracting the virus that reduced the incidence of serious illness by around ninety percent, and that the approval already granted to PFE for the vaccination of children was being held up for Moderna. As I said, they are all stories that could be expected to hurt Moderna’s stock, but coming as they did in rapid succession, it created a feeling that everything was going wrong and a rush to exit positions in MRNA.

That rush was so impactful because the high from which the stock has fallen was itself overdone.

I have often said in these pages that traders are like sports and news talk show hosts: they overreact to almost everything. That is for a couple of reasons. First, when you are one hundred percent focused on one thing, every piece of news takes on exaggerated importance. Second, traders have a herd mentality that comes from a pervasive fear of missing out, or FOMO.

I well remember sitting with bated breath, waiting for the release of data that to us in the dealing rooms of London was of massive importance, completely losing sight of the fact that something like U.S. non-farm payrolls just weren’t that big of a thing outside our little world. Anything other than the expected number when the release came would produce huge emotional responses, ranging from ecstasy if you had predicted the outcome and were positioned right, to despair if the opposite were true. That kind of emotion led to moves rapidly overshooting their logical endpoint, moves that were pushed even further as everyone jumped in to avoid missing out on what was now an obvious trade then having to explain to their boss why they weren’t in on it.

That is what happened to MRNA on the way up to the $497.49 high, then again on the fifty percent plus drop. On the way up, approval of their Covid vaccine and its proven safety and efficacy led to wildly optimistic assessments of what that meant for revenue and profits, and the resulting upward momentum dragged everyone in. Then the focus shifted to what was known all along, that MRNA wasn’t the only player in the vaccine game, and we returned to a more realistic valuation. That in itself produced some momentum, so when bad news piled upon bad news, the selling rapidly accelerated way past that point.

Just as a logical analysis would have told you that $500 back in August was the market getting ahead of itself, however, so a similar approach now indicates that a bounce is coming before too long.

The fact is that even if the overly optimistic expectations of the summer won’t be met immediately, Moderna has derived massive benefit from its Covid vaccine already. It finds itself in a position that is the dream of every biotech company, with a proven approach and a robust pipeline that utilizes it, a huge hoard of cash to fund future R&D, and a large sales, distribution, and marketing network in place. Regardless of what share of the global Covid vaccine market they end up with, the long-term prospects for MRNA are way better now than they have ever been.

That is why, while the stock could well go lower over the next few days or even weeks as analysts adjust their estimates from overly optimistic to overly pessimistic, it is one that I will be looking to pick up over time with a dollar cost average approach. The events of the last two years have given Moderna a leg up that will last for decades, and the overreaction to the overreaction leaves it at a point where that potential is unaccounted for.

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