Value Investing

Biotechs: A Short Seller’s Perspective on Shorting (And Buying)

By Long Short Trader

I avoid shorting biotech stocks. I prefer buying biotech stocks, and have been long several biotech names. Here is the internal debate currently taking place inside me:

(1) Avoid Biotechs –  I have no edge, and can’t possibly develop an edge on single-name biotechs. I am the patsy on the table, in the biotech stock casino. Focus on businesses I can understand, that are in the domain of ‘know-able’.  Even hedge fund operators with relevant M.D. / P.H.D. credentials, relevant industry experience, and scientific knowledge are often humbled by Mr. Market. Also, the last leg of bubbles tend to be the most dangerous one.

Biotechs Nasdaq Biotech Index healthcare Westwood

(2) Short Biotech, Take No Prisoners – The more macro, “top-down” analyst within me is telling me to short biotechs, either via indices, basket-cases, or maybe even single names. What leads me to this belief? Fund flows, price action (in aggregate as well as some truly historically exceptional price movements, e.g. ICPT ITMN without loss of generality), the (lack of) quality of many recent IPOs (?), etc. A friend of mind tells me the bull case for biotech is that human genomics is a game-changer, and that this boom has more legs. Perhaps. Recall, however, that the internet, too, was a game changer … that didn’t change the fact that it was a great short.

I will likely avoid biotech names (as shorts) at this time, but may change my mind if I feel like it.