A biotech stock sell off is coming as valuations soar into the fantasy island realm.
If you want to play in the biotech stock realm, you’ve got to suspend disbelief that stocks represent any form of value whatsoever. Let’s take an example of a biotech stock we traded some months ago, Sarepta Therapeutics.
Sarepta Therapeutics may one day have a cure for all the major types of muscular dystrophy. They are currently focused on Duchenne muscular dystrophy (DMD) and their upcoming August 19, 2019 PDUFA.
Check out this video posted by Sarepta Therapeutics:
Ohh, who doesn’t like a good emotional dog story?
I personally have a form of muscular dystrophy and I need leg braces to walk. You can bet I have an emotional attachment to this dog and ultimately a cure for humans! But all the emotion aside, it doesn’t mean I’m going to chase SRPT higher.
Just last week, we got the news that Pfizer’s DMD drug has severe side effects. This bad news for Pfizer caused MOMO traders to pile into SRPT stock.
Just so that we’re absolutely clear about how overvalued SRPT is, the market cap is now $10.82 billion. The company only did $323.4 million in sales last year. The stock is trading with a Price to Sales ratio of 33.45.
I don’t want to just pick on SRPT. Most biotech stocks are way overvalued just like SRPT.
Biotech Stock Sell Off Coming
A biotech stock sell off is coming as proven by the seasonality chart for biotech stocks.
It’s possible that the seasonal drop in biotechnology stocks over the last 5 years, that occurs between August 1st and October 31st, could simply not happen this year. But who wants to make a bet on that when the economy is slowing, the Fed is contemplating rate reductions, and geopolitical events have made stock trading more risky than ever?
The weakest 6 months of the year is all about the risk-off trade. Biotechs are all about the risk-on trade. These two can not mutually exist during the same time frame.
You may be able to squeeze some more profits out of biotechs before the end of July but remember to book those profits before the August – October seasonal sell-off hits.
Disclosure: I do not hold any position in SRPT.