by   |   September 3, 2014   |   on ,

Bet on biotech’s capricious nature

Where oh where can we make money in this market?

That question is harder and harder to answer in a market that keeps on ascending.

Valuations are stretched, creating fewer and fewer bargains.

If you want to make money, best to throw fundamentals out the window.

That leads us to the biotech space and the capricious nature that allows investors today to make money. By capricious, I mean unpredictable or volatile. We have that in spades in biotech.

Take Gilead Sciences (NASDAQ: GILD), for example.

It’s printing money with its high-priced liver drug. Investors have now bid up shares of the company to a valuation of more than $150 billion.

That’s heady stuff, considering the number of companies with valuations that impressive.

Is Gilead deserving? Who the heck knows?

When Gilead released earnings for the second quarter, the stock, which was trading for about $90 per share at the time, barely budged.

If valuation mattered, one would have expected to see a jump in share price in the immediate aftermath of the news being released.

That did not occur.

For some reason, we needed to wait a month for Gilead to add $20 to its valuation.

Now that’s what I call volatile and unpredictable.

Next up on the biotech rocket ship might be Regeneron Pharmaceuticals (NASDAQ: REGN).

Over the weekend, Regeneron announced that its experimental cholesterol drug cut the risk of heart attack and stroke by 50%.

The success is just the sort of miracle that should trigger a massive jump in share price.

So far, the news is just a blip. Shares of Regeneron are up a modest 3% or so after the big announcement.

A drug that can immediately impact a monster market of millions of customers sees its stock move only a few points.

That makes no sense. Regeneron has a market capitalization currently of $36 billion, far less than a Gilead, for example.

To the extent this experimental drug hits the market, we could be looking at a stock that doubles in value or more from current prices.

Yes, the share price of Regeneron has appreciated greatly in the last year. That simply does not matter in the capricious world of biotech.

What matters is perception, and here the perception is that Regeneron is about to hit the grand slam.

Credit Suisse has a $400 target on Regeneron. I’d like to know where Credit Suisse obtained that number. From thin air might be the answer.

I can do one better and say that Regeneron is deserving of a $50 billion market cap or more, perhaps much more.

I can pick a number out of thin air with the best of them, don’t you think?

Such is the way of life in a market where valuations seemingly matter little.

Sounds like the dot-com era if you ask me, and while we all know how that era ended, we also know that for a period of time there was big money to be made for those willing to take the risk.

We are in such a moment now.  Regeneron is likely to continue to appreciate as long as the potential of hitting that grand slam remains real.