Biotech stocks have been on a wild (and underwhelming) ride this year, with the iShares Biotechnology ETF (IBB) dropping 3.3% year to date as the rest of the market ripped higher on the back of technology names.
Although it's been quite a slog for the broader basket of biotech and pharmaceutical stocks, I view some of them as intriguing value picks to play a potential wave of economic volatility brought forth by rate hikes and sagging economic growth.
Though one has to imagine that the Federal Reserve's job is almost done, with inflation now well off its peak levels, it's been tough to get any sort of dovishness or hints of a 2024 rate cut out of Fed Chair Jerome Powell. Sagging employment numbers and weakness in economic data may be enough to stop rate hikes in their tracks. However, investors must be prepared to hang onto some kind of safety net going into year-end should earnings pressure pick up.
Pharmaceutical stocks are relatively defensive ways to ride out a recession. And even if an economic downturn never happens, battered biotechs like Moderna (MRNA) may have a lot to offer to value investors who are willing to dip a foot back into the biotech waters.
Moderna Needs a Post-COVID Shot in the Arm
Moderna stock was one of the saviors back in 2021 when it pulled back the curtain on the first COVID-19 vaccine. Shares eventually peaked in September 2021 at more than $416 per share - then went on to shed over 77% of their value at the low point hit just last month.
Indeed, it's been quite a slog for the mRNA tech pioneer. As the vaccine business tapers off, so too does Moderna's share price. However, with a new BA.2.86 COVID-19 strain (yes, it's back again) on the radar of the CDC, there's a good chance Moderna may get another shot in the arm.
Still, investors should temper their enthusiasm on this front. It's doubtful vaccine uptake will be anywhere near the levels achieved back in 2021 or 2022, thanks in part to vaccine fatigue. In any case, COVID-19 vaccines could be the key to getting us out of the pandemic for good - even if it already feels like the days of COVID-19 are well behind us.
Beyond the vaccine business, though, Moderna has plenty of promising candidates in its innovative mRNA pipeline. Of course, a personalized cancer vaccine breakthrough could easily send MRNA stock right back to its 2021 all-time highs.
For now, it remains uncertain as to if or when such a needle-mover will happen anytime in the near future. As is the case with any biotech pipeline, there are a lot of hurdles (clinical trials) to get through before any promising candidate can turn into a cash cow.
In a way, playing a biotech stock because of the potential of its pipeline can be like buying an option on a breakthrough. When it comes to Moderna, though, I view the stock as an option worth pursuing.
More Than a One-Trick Pony?
Of late, investors have rapidly lost patience with Moderna, even with a new COVID-19 strain out there. To many, Moderna is a "one-trick pony" with not much else to offer beyond its vaccine business.
On the other hand, bullish analyst Michael Pye of Baillie Gifford believes the market is "missing" the company's "huge cash piles and genuine R&D Platforms and pipelines."
Indeed, Moderna is flush with cash ($14.6 billion), and it's more than willing to spend that hoard on its mRNA pipeline, which could yield the next blockbuster.
But given the lack of clarity as to when the next post-COVID vaccine business will start bringing home the bacon, MRNA has been punished. With rates rising at this pace, investors want certainty regarding future profitability, not excessive spending on efforts that may amount to nothing more than heartache.
To be sure, there's a lot of risk associated with a company like Moderna. However, if the firm can prove it's more than a one-trick pony, the upside could be massive.
What About Valuation?
Moderna stock trades at 4.1 times price-to-sales and 2.4 times price-to-book. As the COVID-19 vaccine business continues sagging, it may be tough to stop investors from continuing to bail.
That said, if MRNA is undervalued, it could be astronomically undervalued. If you're of the belief that all of the company's mRNA pipeline spending won't be for nothing, I think the shares are worth holding onto for the long haul.
Given how quickly Moderna rose to the occasion in the early days of the COVID-19 pandemic - it took only 11 months to get the new vaccine created and authorized - I think it would be a mistake now to discount the firm's ability to innovate.
On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
