Lately it seems that most of the stocks in my database have become overpriced relative to historical valuations. Some might consider these prices justified based on the merits of the individual companies or macro economic factors affecting the biopharma sector. They may be correct, but I have to consider at least the possibility of a developing bubble and limit my exposure. This leaves me a few options regarding my remaining cash reserves.
1. Keep it in cash and stay on the sidelines. Very wise for a retirement strategy but the whole point of my biopharma concentration is to get wealthy before retirement. Cash isn't going to get me there.
2. Short stocks. I've started doing this with mixed results so far. Being deep under water on Acadia has negated my gains on the other five stocks I've shorted.
3. Diversify into cheap spec stocks that have a good chance of going to zero but can also become multibaggers. I've always hated this strategy because it attracts the lowest common denominator of traders who have zero objectivity, do minimal DD, and believe everything management says. In a word, suckers. On the other hand, there are ways for a trader with experience in the sector to optimize his chances of picking a winner rather than going to zero.
No matter how bloated valuations get in the biopharma sectors, there will always be sub-dollar stocks that are existing under the radar. With that in mind, I've recently taken significant positions in Palatin, Mast, and Cytomedix. What I look for in these companies is cash and catalysts. Reverse splits, dilution, and stagnation are death for this strategy. In general, the best time to buy is on a stiff decline after a financing with a defined catalyst within a year's time.
In the case of Cytomedix, a nasty dilutive financing drove the stock down from the 0.70 range to the 0.50 range but the company had 7M in cash as of the end of Q1 and commitments for another 18M which should prevent another sharp decline before the end of the year. Meanwhile, the first interim analysis in the RECOVER-Stroke trial will take place in the near future and barring any nasty surprises may draw some stem cell hypers back to the stock. Topline data is expected in H1 2014.
Keep in mind that I believe the late stage trials in progress for all the companies I have mentioned will fail. Because the stocks trade in the pennies and at low volumes, someone will have to draw attention to the upcoming catalysts to create a run. That person won't be me. I might bet on hype and manipulation, but I won't have any hand in creating it. [more]