Stem Cell Stocks: Buying a Will-o'-The-Wisp?

To slightly paraphrase one analyst, anybody buying stem cell stocks solely based on the House vote on ESC research should be prepared for a long, hard ride.

In the wake of the Congressional action, Aaron Smith of CNN prepared a more nuanced report on stem cell stocks than we saw in news reports last week.

Smith wrote:

"In anticipation of today's vote, investor interest in biotech stocks has been whipped up, though biotechs probably wouldn't benefit directly from the funding, even if it's eventually approved.

"'This is a step in the right direction, but if anyone is buying StemCells Inc. based on this one vote, they need to rethink their priorities,' said Steve Brozak, analyst at the investment and research firm WBB, referring to one of the biotechs involved in stem cell research."

The CNN report continued:

"Although StemCells Inc. (down $0.08 to $3.35) stock fell about 2 percent Thursday, the stock's climbed more than 25 percent so far this year. It's the most recognizable name in the industry, analysts say, even though it doesn't stand to benefit directly from the vote.

"'The stock [StemCells] is probably most tied to political movement, just because of the ticker," said Jose Haresco, analyst for Merriman Curhan Ford & Co., an investment research firm, referring to the company's stock symbol of STEM. "It's almost a perfect barometer."

"The stock of Aastrom Biosciences (down $0.08 to $1.46) slumped about 5 percent Thursday, but overall gained about 20 percent this year. Haresco said that StemCells and Aastrom specialize in the use of adult stem cells however, not the ones derived from human embryos, which are the subject of the bill.

"The stock price for Osiris Therapeutics (down $1.37 to $26.77, another biotech specializing in adult stem cells, also gained this year, though it slumped about 5 percent in Thursday trading.

Geron Corp., (up $0.20 to $8.90) a biotech developing stem cell technology which is based on human embryos, has been volatile this year and only pulled into the plus column Thursday, when the stock rallied about 2 percent. The stocks, save for Geron, had run up after news of the possible House vote first surfaced last week.

"'Geron is clearly at the top of the pack," said Brozak of WBB, who rates the company a "strong buy," noting that it is the most advanced in the development of embryonic stem cell technology.

"Geron's most recent stem cell study involved rats, not people, though a spokesman for the company said early-stage human trials will begin in 2007."

Stem Cell Market Fever: A Cooler Perspective

Are stem cell stocks really rising because of Democratic control of the House of Representatives? Probably not.

Are markets truly rational? Are stock analysts always well-informed? Probably not.

The questions come up because of a few articles concerning the sharp run-up in the price of some stem cell companies, including those based in California, in the last two days. The Associated Press (in the San Jose Mercury News and elsewhere) attributed the increase to the improved prospects of House passage of a measure aimed at encouraging federal embryonic stem cell research.

These daily trading stories are usually ripped off by relatively inexperienced reporters who grab the quickest and catchiest explanations for price rises. Some of those come from analysts who may not be well-informed and who do not understand that a presidential veto is likely again on the stem cell bill – a veto that probably will not be overridden. Even if it is, the National Institutes of Health are already hard-pressed financially and are not likely to come up with major increases in ESC reasearch funding, certainly nothing on the level of California's $3 billion giveaway. Beyond that, the markets have already factored in Democratic control of Congress, which is months-old news.

A more likely cause of the upsurge in stem cell stocks is the wave that boosted biotech stocks generally because of good news about Amgen, among other things. Here is what the Wall Street Journal had to say this morning:

"Amgen, (Nasdaq) the second-largest U.S. biotech company by market value, behind Genentech, gained 2.93, or 4.3%, to 71.33. Bear Stearns upgraded Amgen's shares to 'outperform,' saying the stock already reflects potential impacts from Roche's prospective introduction of a competitive anemia drug. If Roche's drug doesn't reach the market, the upside for Amgen's stock could be 'dramatic,' Bear Stearns said."

Stem cell stocks are thinly traded but may be carried along in a burst of buying in the biotech sector. Traders sometimes spread their bets across a sector.

Also not mentioned in the stories is the impact of automated trading programs that trigger purchases as an entire sector moves, in other words, a computerized bandwagon, which may or may not be rational depending on your point of view.