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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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In the Pipeline

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April 8, 2007

Buy! Sell! Shout! Moan!

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Posted by Derek

Some readers will remember a 2005 run-in that I had with stock pundit Jim Cramer over Biocryst Pharmaceuticals. I disagreed with his recommendation to buy the stock, since I didn't think much of their drug for avian influenza, and (rather to my surprise) he e-mailed me, saying that hey, the call was correct because it made money. The best response to this line of thought was the one I saw over at The Stalwart, namely: "Jim Cramer likes to say "There's always a bull-market somewhere" and in the short-term he's right; it's wherever he says it is." When you're the host of a hugely popular stock-picking show, it's a little precious to defend your picks because they went up after you picked them.

But what if they go up after you tell people to sell them? I wrote last week about the cancer vaccine companies. Well, as it happens, Cramer told people to bail out of Dendreon the day before the FDA advisory panel gave them a good review. As you'd imagine, some of his listeners are rather peeved about that, looking at the stock move they missed out on.

But I actually have a bit more sympathy for Cramer this time. Predicting which way some of the FDA hearings will go is a fool's game, and you're as likely to be wrong as right. Picking against Dendreon made as much sense as coming out for them; it wasn't a stupid call, except in the sense that any call was a stupid one. The reaction of his audience leads to a larger conclusion, though, which is that picking stocks based on listening to Jim Cramer yell about them is a fool's game, too.

For example, if you'd bought Biocryst right after Cramer told you to in October of 2005, you'd have gotten in at about 13 at the open. It went right up past 17, at which point he told his audience that the trade was over, and it was time to get out. Once his listeners did that, the stock went back to 11 and change in November - but by the next spring, it was over 20. You'd have done better buying right after Cramer told you to sell, in other words - but only if you knew when to sell, yourself, which is the fine-print clause that sinks most of these wonderful stock stories. BCRX is now below 9, by the way. I have no clue whether you should buy it or not.

All of its price changes were driven by all kinds of news - alliances with other companies, development news on both the bird-flu stuff and on completely unrelated drugs, the usual range of things. None of them had anything to do with some guy shouting on a TV show. They were all about things out in that other place - the real world, which (as has been demonstrated many times) isn't as well-scripted as television.

Comments (11) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. datadriven on April 9, 2007 8:53 AM writes...

Derek,

Good post! You will have to let us know if Cramer comes back at you on this one. Also, do you mean precocious or precious in the first paragraph? Either option is entertaining.

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2. finance guy on April 9, 2007 9:20 AM writes...

Your post is about random volatility. Cramer is a total shmuck!!! As Ben Graham liked to say, "in the short run, the market is a beauty contest; in the long run the market is weighing machine." Neither of you will know who is right until the cash register rings.

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3. Still Scared of Dinosaurs on April 9, 2007 10:18 AM writes...

One common mistake I see is predicting the Advisory Committee's vote base on the FDA briefing materials, which are usually made public a day before the meeting. How often do you see headlines such as "FDA Raises Safety Concerns About [Insert drug name here]"?
When I was part of a team representing a sponsor we asked the reviewer about the strong negative slant of their materials. We were told that they only try to cover the basics as far as agreeing to the overall conclusions (such as meeting the primary endpoint) and then they focus the rest of their energy on adding emphasis to anything the sponsor did not highlight.
Given that sponsors try to make the safey presentation as bland as possible that's where the effort goes on the agency side. No big surprise there if you understand the process, but so many commentators and market watchers don't. They overinterpret the concerns as show stoppers and yell "Sell!" I wonder if that's what Cramer did with Dendreon.

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4. Peter the Not-so-Great on April 9, 2007 6:03 PM writes...

I lost what little respect I had for Cramer when I stumbled across his show one day while channel-surfing. He was advising his viewers (in his usual histronic way) to buy stock in Pfizer because they make Viagra; that was pretty much his entire arguement. It wasn't clear wether he meant Viagra was a licence to print money for Pfizer, or if it was a symbol of the brilliant R&D they do, but I suspect it was the former. If it was the former, then he obviously didn't do his homework, since Pfizer's patent on Viagra runs out in a few years (i.e. their cash cow is going to the dog-food factory).

The icing on the cake, though, is the fact that Cramer made his "BUY-BUY-BUY!!!!" recommendation shortly before torcetrapib crashed and burned. I wonder how many people followed his advice, only to get a huge dent in their stock portfolios.

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5. KinasePro on April 10, 2007 12:00 AM writes...

Check eyeonfda for a timely podcast.

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6. SMIP on April 10, 2007 8:21 AM writes...

Hi. Derek: Excellent post. I enjoy your blog very much. I used to work in the drug industry for about 14 years. However, I found my training and background can
be used for investment too. So, I have been learning and doing investment for the past two years full time.
The key lesson is investment is all about behavior finance/economics. The rest is pretty much same as doing scientific research.
Have you thought about changing your career?
Anyway, good luck with your job search and have fun writing your blog.
SMIP.

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7. PharmBoy on April 10, 2007 9:44 AM writes...

All one has to do is be a victim of a cold-caller with a "can't miss" stock tip to realize what thieves all of these guys are. I fell into this trap a few years ago and turned $14000 into $7500 almost overnight Never again...

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8. quantry on April 10, 2007 5:59 PM writes...

Cramer's show is mostly noise but as a professional investor I've been reading his columns for quite a few years and find them, on the whole, useful as a way of monitoring the zeitgeist. He usually tells people to do their own homework as well as using his ideas and then he gets blamed because so many of them obviously do stupid things. It would be nice if one could take a buy and hold approach to biotech but they are so darn volatile as your post indicates that is virtually impossible so, given that fact, one is forced to take the measure of the noise from short termers like Cramer.

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9. paul on April 10, 2007 10:52 PM writes...

If someone is buying becuase Jim Cramer says so, they deserve to lose their money.

Judgments should be made upon multiple sources, not the loudest. I love watching Cramer, for the occassion where his beliefs and mine intersect, and he is out there cheerleading my stock on.

(of course I also enjoy Pat Buchanan for the 'rare' agreement, no one states their arguments better. no opinion on the correctness)

Cheap biotech(microcaps) are going to flourish, because everyone thinks there is a chance to make a ton of gold. Good news in the industry bolsters speculation, and it seems like every summer I get hit with a ton of articles and magazines touting the latest discoveries...so summer is the time to buy, but oone wouls be far better suited to take advantage of speculation than pursue the actual chance that your micros are going to be making silver bullets.

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10. utenzi on April 11, 2007 12:18 PM writes...

I love biotechs, Derek. Since they are rarely profitable the usual measures of corporate performance don't work. Thus they're "evaluated" on the basis of the biotech's "good story" about their pipeline and whatever rumors or press releases are currently circulating. What a great situation for speculation!

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11. DJ/Kelley MBA program on April 12, 2007 5:45 PM writes...

you guys are clowns -- Cramer is actually a great guy, if you buy everything he recommends, you're the fool, not him.

The show is about prodding you to do your own HW -- I still don't know why people scapegoat him for eveything that goes wrong.

The wise trader says "I screwed up." The fool blames someone on TV for his or her ineptitude.

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