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Summer Sets Up Second Shot at Biotech Stocks

By Adam Feuerstein
TheStreet.com
It's an old saw among biotech traders: Once the big ASCO cancer conference ends and the weather heats up, the biotech sector goes into hibernation.

But is it true? Yes.

The biotech sector does take a breather during the summer months, according to my fairly simple (and not entirely scientific) analysis of biotech stock movements over the past six years.

The period from June though September isn't the best time to expect much performance from your biotech portfolio, but it can be a good time to pick up stocks on sale. Timely purchases of stocks when many market participants are at the beach or in the mountains can pay off with healthy returns later in the year.

To test the veracity of the "biotech summer doldrums" theory, I looked at trading activity of the Nasdaq Biotechnology Index during the June 1-Sept. 30 time period for each of the past six years.

I chose this index because it's made up of 175 biotech companies encompassing small-, mid- and large-cap stocks.

The time period was admittedly arbitrary, but it seemed to make sense. June 1 is close enough to the start of summer and the end of the academic school year, which is traditionally seen as a hiatus period for medical conferences.

By my chosen end date, Sept. 30, Wall Street is definitely back in action. The end of September is also close to the start of the fall medical and investment conference season.

When I looked at biotech stock prices during this period, I found that in four of the past six years (including two of the last three years), the Nasdaq Biotechnology Index fell from June 1 through Sept. 30. In the down years, the average drop in the index was 14%.

In the same four down years, the 52-week low for the Nasdaq Biotech Index occurred in the June 1-Sept. 30 time period.

Summer Doldrums?
Performance of the Nasdaq Biotechnology Index (NBI)
Year June 1 to
Sept. 30 June 1 to
low of period June 1 to
high of period Did 52-week low occur during this period?
2006 -2% -9% -1% Yes (July 18]
2005 15% -4% 16% No (April 28]
2004 -7% -19% -5% Yes (Aug. 9)
2003 5% -4% 17% No (Feb. 13)
2002 -20% -31% -6% Yes (July 10)
2001 -27% -32% 7% Yes (Sept. 21)


This latter point is probably the most interesting because it shows how the summer can be a good opportunity to pick up otherwise quality biotech stocks that just happen to be taking the summer off from gains.

Last year, Gilead Sciences (GILD) traded down into the mid-$50s in late June. If an investor bought the stock then and held it through today, he'd be up about 45%.

During the summer of 2006, Acorda Therapeutics (ACOR) shares sank through $3 and bottomed out at $2.22 on Sept. 22. The next trading day, Sept. 25, the company announced positive phase III trial results and the stock soared to more than $8.

I've written positively about Exelixis (EXEL) in the past because of its deep pipeline of targeted cancer drugs scattered through early and mid-stage development. Yet the company's relatively high valuation has always been a sticking point.

But last August, Exelixis shares slumped into the $7.50 range, making it an excellent entry point into the stock, which now trades just under $11.

The point here isn't to look back at some charts and claim brilliance with some well-timed stock picks. It was an arbitrary choice of time frame, and a six-year period isn't that long. What's more, the summer months aren't exclusively when biotech stocks fall, and in two of the six years I looked at, stocks went up during the summer.

But my analysis does suggest that biotech stocks do slump in the summer, often to year lows. If you feel like you've missed out on a biotech stock's run-up earlier this year, the June-September time period can -- and often does -- offer a second chance.