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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: Don't miss Derek Lowe's excellent commentary on drug discovery and the pharma industry in general at In the Pipeline

In the Pipeline

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October 17, 2005

James Cramer, Biocryst, and You

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Posted by Derek

I sent a copy of my post on Biocryst (BCRX) to Jim Cramer at his CNBC e-mail address, even though I'd said some unkind things about his pick, and he was kind enough to respond. His take was exactly that of a man who used to trade stocks for a living. He pointed out to me that the stock opened between 13 and 14 after he recommended it, then climbed to 17. If I'd bought a thousand shares, he went on to say, I'd have "the down payment on a decent car", and if I'd bought 5000 shares I'd be looking at tuition money.

As he put it, he's not asking for any praise from me, but feels that I "should at least accept the fact that the trade was money good." Well, I can't deny it: I do accept that anyone who ran out and loaded up on BCRX after he boosted it made money on the trade, and that's what that a stock transaction should do for you. But as I said to him in my reply, 5000 shares at $13 is a bit more "mad money" (to use the title of his CNBC segment) than I happen to have sitting around, so that may not be a very realistic example.

I should add that anyone who opens up a $70,000 position in a small NASDAQ stock because someone on TV said it was a good idea had better have a lot of money to lose. Most people who can afford to drop that kind of money probably aren't acting on tips they hear on investment shows, though, or at least I hope they aren't. This kind of thing can actually turn a profit on a majority of your individual trades, but the whacking losses that show up every so often will more than make up for those. Rabbits that try to make a career out of dodging 18-wheel trucks have exciting careers, and may feel for a while as if they're ahead of the game, but tend to end badly. You may be able to tell that I'm not what they call a "momentum investor".

And there's another factor that Cramer (and other well-known stock pickers) don't always want to address. As stock-blogger The Stalwart put it the other day, "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". Exactly. Cramer's counterargument to me is, basically, that he was right because he told a million viewers to go buy the stock and see? It went up!

To his credit, though, I see that he fielded another question on his radio program today about Biocryst, and advised people to take their profits: "the trade's done". He doesn't seem to have sent it down by doing so, though, which is only natural. People are much slower to pull the trigger on sell orders than they are to buy, and there are plenty of hopeful sorts who still seem to be crowding into the stock.

I've little doubt that BCRX will continue to go up for a while. The public fears of avian flu will lift it. Am I going to buy any? Absolutely not. I know too much about the science to be comfortable joining that kind of herd. Am I going to short it? Not yet, although I've heard from a reader who was already short before I wrote about the possibility. I hope he's got some reserves handy.

If I join him, I'll post the trade. My temperament generally doesn't allow me to try to make money by counting on ignorance on the long side, but for some reason I've no problem letting ignorance help me out on the way back down. The problem is, I tend to underestimate the craziness and greed of my fellow investors. . .

Comments (9) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. Martin on October 17, 2005 9:53 PM writes...

Having worked in the investing side of the healthcare equity markets, I can assure that you there are pros out there who invest on less than Jim Cramer's say-so. And you can still make a killing. That being said, biotech always seems rife with shorts, why short BCRX when MLNM seems to be a perpetual short? The market seems to be valuing Velcade and the pipeline at a little under $2bn, which seems ridiculous (run rate revenues of ~$200mm).

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2. Blaise on October 17, 2005 10:09 PM writes...

My perspective on Cramer's picks is this: Let us say that he hypes BCRX (for example), I try to find a relatively undiscovered same sector stock in this case "avian flu stock" like NVAX. Invariably these go up too as his pick (BCRX) brings millions of viewers attention into whatever sector he is pushing especially in the small caps. It also seems to me that you have a little more time to get into the undiscovered stocks this way.

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3. bronxite on October 19, 2005 2:07 PM writes...

I think Mr. Cramer's comments might be more sensible within the context of a high rate subscription service like Bloomberg. Unfortunately, he plays to a much more pedestrian audience. Most of these people are in need of general advice on how to invest, but get ahead of themselves by turning to Cramer for edutainment. In the end I believe that more harm than good is done. CNBC should nix his show before they find lawyers knocking on the door.

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4. Marty on October 19, 2005 6:43 PM writes...

This editorial is essentially laughable. Derek and the cheerleading squad lampoon Cramer and claim that BCRX's momentum is as a result of him pumping the stock. Bullocks and BS. Your opinion of Cramer seems to vary according to the angle you wish to attack him. You guys simultaneously claim that Cramer is a joke but that he also commands such a powerful following that they're able to jump into a stock and pump it up to such great heights. Cramer's "home gamers" don't have the capital to pump up stocks in that fashion, unless you wish to say some of his viewers have a considerable amount to invest in his picks. Cramer's viewers were definitely not the only ones "pumping the stock." Just take a look at the various analyst ratings on the stock and you'll see that attributing the rise all to Cramer is ridiculous. Beyond that, he has told people the trade is over, so there's no way to hold him responsible if they sustain loses over it. Don't allow your jealousy of Cramer to overpower your logic.

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5. Liz Shaw on October 20, 2005 4:05 PM writes...

I often use Cramer as a contrarian indicator if I'm holding the stock already. I bought BCRX at 9.90 after watching it closely for over a month, well ahead of the avian flu hype on TV. I sold it the day after Cramer recommended it, and as his viewers were buying. Made a tidy profit.

I watch Cramer for entertainmet, but I do have SwingTracker open so that I can look at what he recommends. I wouldn't buy 95% of what he recommends at the time he recommends it based on the indicators that I use. The one thing that he is alway correct on is that you need to do your own homework before buying any stock he recommends.

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6. Fish on October 22, 2005 3:50 PM writes...

There is a lively discussion of BioCryst-related issues going on currently as big stakes are leveraged higher on the fear of the wild strain type of the virus augments etc., along with mention of any Flu citings.....Certainly everyone is entitled to their opinion and at the same time everyone is entitled to legitimate inquiries into the effectiveness of any prospective remedies or cures.

It has occured before and it will occur again that any company would do well to take advantage of misinformation or a mania and then lure investors with claims to produce a panacea or a potential cure to the a'la global mania du jour.

Optimism and target prices without scientific foundations are recipes for disaster to bullish investors. The projections for BCRX and their potential as a global pandemic savior are not congruent. Investors seeking to take advantage of excitement, fear and panic can and often make a pretty penny by buying up shares in a quick and hasty manner; however their is a downside to this impulsiveness.

Supply and Demand sometimes dictate play in the market when natural forces apply. In this case, we may be looking at a virulent virus like marketplace. Simply put, validation of value is being manufactured by the sharks of the business. I don't blame Cramer, NYTimes or even old businessweek as they are in business to sell something that the public wants.

Those who are in the know like the Julian Baker who just reported 2.3 million ownership in the BCRX have done so almost certainly in preparation for a stock sale. Those who are big inside holders must report to the SEC first when they own and then to sell and in that order.

Beware of the marketing machine and its slimy tentacles since they often lead to dissapointment if not now then sooner than expected.

As for doing your homework, I think you would need a biotechnology degree to even get started on Chapter One of this assignment.

Market capitalization like that of BCRX lately seem exceedingly high for the potential of the firm's most optimistic projections.

In studies in 2004 where the some strains of the wild flu are concerned the Biocryst answer is not as effective (in terms of the high concentrations necessary to achieve susceptability) as other compounds in its class.

Like others, I believe in fair value opportunities for BioCryst and others but I am certainly not going to be last one looking for a chair to sit down when the music stops. (to quote a fellow interested party)

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7. daen on October 24, 2005 6:31 PM writes...

I'm 100% with Derek on this. Invest in what you know, do your own research - and don't rely on pundits to do your thinking for you.

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8. Ruby J. on March 2, 2007 3:11 PM writes...

Dear Jim,

Is Investools worth @2000? Also is this a good time to buy DD and JNJ? Thanks.

Sincerely,
Ruby

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9. david poindexter on May 31, 2007 10:45 AM writes...

is winn for real, or is this still in short rally

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