"Biomed shares are hot. I work in high tech, and everyone on the job talks about these shares every morning," wrote a reader in a talk-back to a "Globes" article recently. Such voices are no longer heard only in the field, but also among underwriters and analysts - biomed shares, once a preserve for long-term investors, are now targets for speculators, day traders, and private investors.
Movement in biomed shares reflects this new reality. Any news item, no matter how interesting or not, can send a share soaring or plummeting.
It is quite clear why speculators are targeting biomed shares. Most of the shares are small cap, and therefore prone to volatility. No one knows how to assess a company's real value on the basis of sales, because the companies are fairly new, and therefore fashionable and have no market structure. Anyone can pretend to be an expert.
New biomed companies on international markets also attract day traders and speculators, because of the immense effect of a single news item on the share price.
For example, an announcement that a company's drug has obtained fast-track approval by the US Food and Drug Administration (FDA) can send the company's share up 10% in a day - and fall as much the day after. This seems to be because the true expert knows that fast-track approval is meaningless for a company's standing.
Biomed companies' executives and controlling shareholders tend to whine about the mix of investors in their companies. Either that or they deny that speculators are among their major shareholders. Is the prejudice against speculators justified, and do they really harm biomed shares?
On the downside, extreme volatility in a share unlinked to substantive developments in the company creates an image of charlatanism that is liable to harm biomed companies. Such volatility is also liable to deter investors seeking stable stocks. In addition, extreme volatility relative to news in some shares is liable to put the entire sector into the same boat. From the sidelines, it becomes hard to distinguish companies that announce hard news on a regular basis from companies that are affected by herd behavior of investors without any justification.
Ultimately, speculators will find a new sector to play in and will leave behind companies with no money and disappointed long-term investors.
There is also an upside, however. Speculators' activity brings money into the biomed industry, boosts shares' liquidity, and puts shares into the headlines. For some shareholders, volatility enables immediate transactions, for example, it is possible to hold a rights issue at bargain prices on a bad market day when there is no trading in the share.
On the other hand, when private investors and speculators generate a tail wind, it is possible to raise capital.
Published by Globes [online], Israel business news - www.globes-online.com - on October 20, 2009
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