Like it or not, election season is rapidly approaching. With the novel coronavirus and increased mail-in voting, it’s safe to say that is anything but a normal election. While you may have an opinion on the candidates, the stock market doesn’t — it has historically experienced increased volatility right before, during, and after national election day, regardless of which party wins. The biotechnology industry, in particular, already experiences higher average volatility than other, more stable industries such as the fast-moving consumer goods industry. Coupled with the election, biotech investors may be in for a bumpy ride. What actions should you, a hard-working, diligent, and patient biotech investor, take to prepare for the storm ahead? Keep reading to find out.
By: Matthew Rojas, Biotech Financial Analyst
Invest in Stocks with Low Volatility
In financial lingo, low volatility stocks are those stocks that have a beta value of less than 1.0. According to Investopedia, “Beta is a concept that measures the expected move in stock relative to movements in the overall market.” If a particular stock has a beta of 1.0, then one can consider it a gauge, in terms of volatility, of how the overall stock market is performing. Furthermore, stocks with a beta above 1.0 are considered more volatile than the overall market, and stocks with a beta below 1.0 are considered less volatile than the overall market. Logically, risk-averse investors would prefer the latter, especially during election season when the market volatility is likely to increase.
With a simple search in the Yahoo Finance database, you can easily find the beta value of any stock. There are several low-beta biotech stocks; however, they tend to be the more popular names within the biotech sector that have historically performed well in times of economic downturn. Some excellent examples include Biogen Inc. (NASDAQ: BIIB) and Enanta Pharmaceuticals (NASDAQ: ENTA), with beta values of 0.52 and 0.40, respectively. Low-beta stocks are excellent choices for people who are uncomfortable with market volatility.
Leave Your Money IN the Market
For biotech investors that invest in low-beta stocks, they are less likely to cash out during election season because their stocks will remain more stable than the overall market. However, for biotech investors who hold more volatile stocks (i.e. stocks with beta values greater than 1.0), their portfolios are more likely to experience the inevitable ups and downs that traditionally come with election season. The key for people with portfolios that are subject to more volatility is to remain calm and remember that how stocks perform during the election season is not representative of their overall, long-run trend. In fact, according to the 2019 Dimensional Funds report, “The market has been positive overall in 19 of the last 23 election years from 1928-2016.” Events like the election cause investors to become irrational; they buy and sell their stocks solely based on the stock price and not based on the proper media signals — this is the number one mistake biotech investors make.
Instead of focusing on the short-term volatility, biotech investors need to keep their eyes focused on the long-term trends of particular companies. If a stock loses five percent of its value in a single day, and a quick Google search does not yield a definitive answer as to why this is the case, you should not sell your shares of the company. If, on the other hand, a stock loses five percent of its value in a single day, and a quick Google search reveals that the company experienced a hurdle in one of its clinical trials, then you should consider selling. The bottom line is… only sell stocks in your portfolio based on extensive research.
When to Sell?
The key to knowing when to sell your biotech stocks is identifying the proper media signals. On most publicly-traded company websites, there are typically sections called “Investors” and “Newsroom”. These tabs are usually the best way to find out the most current information about a company, ranging from its most recent SEC filings to clinical trial updates. Some other popular biotech news websites include the Wall Street Journal, Endpoints News, and FierceBiotech. Some of these websites are subscription-based; however, they are each invaluable because they provide you with the most recent biotech company updates.
When a biotech company encounters a particular hurdle, let’s say a clinical trial hiccup, it is critical to assess whether you think the particular company can recover from the hurdle. Some questions you should ask yourself are… Is the clinical trial delayed or canceled? If delayed, for how long? Is this delay significant enough for competitors to surpass the company in question? If the clinical trial is delayed for a few short weeks because one patient had a severe reaction to the drug, do not sell the stock but do keep a close eye on if other people experience similar symptoms. If the phase III clinical trial is canceled and the biotech company has no other product candidates in the later stages of clinical trials, then you should sell.
Take Advantage of the Volatility
As a biotech investor, the election represents a perfect opportunity to take advantage of market volatility. If a particular stock decreases in price and there are no negative media signals on the company website or supplementary databases, this represents a perfect time to buy-in. Remember, election season usually produces artificial volatility; it does not represent a long-term trend. Keep a close eye on the stocks that have made you say to yourself, “If this one goes down in price a little bit, I’ll buy-in.”
The Bottom Line
Because the circumstances surrounding the 2020 election are so unusual, many are predicting a higher degree of market volatility than in previous election years. Investing in low-beta stocks is a great way to avoid some of the market volatility stress. However, if you do own more volatile stocks in your portfolio, be sure not to cash out based on short-term, artificial price decreases. On the other hand, do not invest in a particular stock solely because the price increases by five percent on a given day. Whenever you invest in stocks, research is the most important part. Look for positive and negative media signals, and then sell or buy-in based on that information. Lastly, if you can, try and take advantage of some of the volatility and buy traditionally more expensive stocks if they decrease in price with no negative media signals. Biotech investors are certainly in for a roller coaster in the coming months — keeping these key tips in mind will help you maximize your returns this election season.