Bottom fishing stocks in 2022: Genomics

Major stock indices might be near record highs, held up by heavyweights like Apple, but there are parts of the market nursing huge losses. Today we explore whether it’s time to go bottom fishing in genomics stocks.

What’s happening to Genome stocks?

Helped by the search for high beta growth stocks after the Fed’s massive monetary stimulus in March 2020, the focus on digital and technology as part of the ‘stay-at-home’ trade and the development of genetics-based MRNA vaccines, stocks in the genome sector boomed in 2020.

Since the start of 2021 and now again as we enter 2022, genomics company shares are cratering. Investors have backed away from stocks that had been favoured in a low rates environment as the Fed prepares to lift-off ZIRP in a few months.

Looking at two of the most prominent ETFs covering stocks in this sector, they are down heavily – between 60-70% from all-time highs.

 

GNOM

Source: FlowBank / TradingView

 

ARKG

Source: FlowBank / TradingView

Stocks in genomics ETFs.

Digging more into the specific companies we are talking about, the below table represents the top 10 components of the GNOM and ARKG ETFs noted above.

GNOM Top 10 components

Ticker

Name

Weight

BMRN

Biomarin Pharmaceutical Inc

5.56%

SRPT

Sarepta Therapeutics Inc

5.26%

1548

Genscript Biotech Corp

4.72%

 

Qiagen NV

4.69%

RARE

Ultragenyx Pharmaceutical Inc

4.65%

A

Agilent Technologies Inc

4.64%

ARWR

Arrowhead Pharmaceuticals Inc

4.64%

NTLA

Intellia Therapeutics Inc

4.12%

VCYT

Veracyte Inc

4.10%

ALNY

Alnylam Pharmaceuticals Inc

4.00%

 

ARKG Top 10 components

Ticker

Name

Weight

TDOC

Teladoc Health Inc

7.38%

EXAS

Exact Sciences Corp

6.37%

PACB

Pacific Biosciences of California Inc

5.24%

FATE

Fate Therapeutics Inc

5.10%

IONS

Ionis Pharmaceuticals Inc

4.19%

VRTX

Vertex Pharmaceuticals Inc

4.09%

NTLA

Intellia Therapeutics Inc

3.84%

BEAM

Beam Therapeutics Inc

3.37%

CDNA

CareDx Inc

3.18%

ADPT

Adaptive Biotechnologies Corp

3.12%

 

Reminder

Genomics is the study of genes and their functions. Heavy research and technological advancements into the genome have spawned a whole industry of companies that could potentially play a massive part in future medicine and healthcare. At the forefront is CRISPR and gene editing.

To read more about the technology behind genomics, make sure to read our article:

Genomics: the latest healthcare revolution

Why have genomics stocks dropped?

Valuation. The main reason for selling genomics stocks is valuation. Why do investors suddenly care about P/E ratios after years of throwing caution to the wind? The prospect of higher interest rates. Higher interest rates mean investors don’t need to seek returns through growth but can instead turn, at least in part, to fixed income. A higher cost of capital coupled with less demand for equity will also limit the growth potential of growing companies.

No earnings. On a related point, most genomics companies are new and prioritising growth over profits. While revenue growth for many genomics companies accelerated in 2021 over 2020, few have closed the gap enough to anywhere close to producing earnings.

Unproven science. There is an added risk to investing in companies involved in new science and technology because there is no certainty that their approach will work. It is this added risk that creates the long term gain potential but also produces the higher risk of ruin.

Possible upside catalysts for genome stocks

Valuation. Valuation is now much less of a problem down 70% from the highs, however it’s important not to let the astronomic gains from 2020 cloud judgement. These companies are still richly priced relative to other sectors even at these levels - but a low valuation is not something than can be reasonably expected in high growth areas like genomics.

Oversold. On a technical basis these stocks are oversold with many showing readings below 30 on weekly price charts.

Long term growth potential. If you like them at the highs, you have to love them at a 60-70% discount! If the growth potential of genomics is to be achieved, these companies stand to be the giants of tomorrow or to be bought out by the pharmaceutical giants at much higher prices.

The Fed backs off. To finish where we started, it is far from a done deal that the Fed will hike interest rates at the pace being promised. There is growing evidence that high prices are affecting consumption, which could weigh on the economy without extra fiscal stimulus. The Fed could potentially face a tough choice of trying to bring down supply-side inflation when demand is slowing.

Takeaways

Buying genomics stocks now is like trying to catch a falling knife - the momentum is clearly to the downside in a very out-of-favour part of the stock market. However, these stocks are now nearing levels last seen pre-pandemic, making valuations still rich but at least more justifiable to achieve long term growth potential. 

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