At first glance, it would seem that there is action everywhere in today's stock market. In technology , the race to dominate the next generation of smartphones is as hot as ever, a huge slew of powerful chipmakers are fighting wildly for market position, while new platforms have blown open the software market wider than at any time since, well, ever . In finance , bank profits are near record levels, while the easing of capital requirements is finally giving them the ability to branch out. Auto sales are up, American industry and manufacturing are experiencing a renaissance, and social media still has all the promise in the world. Yet today, all of these sectors are just plain boring compared to biotech .
Let's take a quick look at today's biggest advancers and decliners. At the very top of the first list, we have Intercept Pharmaceuticals (icpt). You may remember that back in January, Intercept made one of the great stock breakouts of all time , rising from $70 per share to over $400 per share overnight on positive clinical trial news of its liver drug, OCA. Since then future potential and present predicaments have done battle, drawing ICPT as high as $450 and as low as $210. Today, the stock rose 27% after the company released clinical trial data which left little doubt that the drug was safe and effective.
Near the top of that other list is MannKind ( MNKD ). MNKD stock opened on Monday 21% above its Friday close, on news that small MannKind had made a deal with the giant Sanofi ( SNY ) to distribute its inhaled insulin. In the day-and-a-half since then, the stock has fallen all the way to $7.62-6.3% below its close on Friday-after the company reported significantly worse second quarter 2014 earnings than the Street expected.
News about a company's potential is easily weighed against other such news, i.e., we know, all other things being equal, that a company's potential revenue from a drug doubles if clinical trials prove that it is an effective treatment for twice as many people. Likewise, we can weigh negative predicaments against each other fairly well; we understand how the risk to a company grows, quarter by quarter, if it is debt laden, and its cash flow is negative.
The difficult task is knowing how heavily to weigh the one against the othe r. This is the most maddening thing about biotechnology stocks from the fundamental investor's perspective, though it is also the thing that makes them so exciting to traders. Weighing potential vs predicament requires both guesswork and gut checking, and for small biotech stocks, the tug-of-war between the two is constant.
That said, I believe I have spotted a trend which leads me to a conclusion that, as far as I know, I may claim as original: gut checking and guesswork are both susceptible to the corrupting influence of emotion, and emotion is strongest when the triggering event is closer to us in time, hence any major swing based on the lofty potential or poor predicament of a biotech company is-not always, but with some statistical likelihood-initially overblown, yet destined to even out over time. Hence, one should be able to do pretty well in these cases by immediately making the contrary play.
So what's that mean? Well, call me crazy, but I'd bet that if the two market-moving news events had happened in the other order , MNKD would be higher today than it was at close of trading on Friday, not lower. If I'm right, that makes the stock a good buy today. As to the probability of my being right, investors are encouraged, as always, to do their own research.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC .
This article was originally published on MarketIntelligeneCenter.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.