It isn't easy to anticipate what will trigger the correction of major imbalances in the stock market. Who could have imagined that a joint declaration by President Bill Clinton and U.K. Prime Minister Tony Blair calling for scientists to have access to genetic research could shock anyone. U.K. officials acknowledged they had no program either for legislation or enforcement and termed the declaration a moral exhortation. But biotech investors were horrified, fearing that their favorite stocks would no longer be able to patent valuable discoveries and lock them up. This is a classic pattern when a market sector has become wildly overvalued.
Investors bid growth stocks higher and higher based on increasingly airy profit forecasts.
Many growth investors responded to yesterday's biotech bust by looking for buying opportunities in the sector. Analysts generally cited Amgen among their top picks for a rebound. The company has a nearly debt-free balance sheet and projected annual earnings growth in the high teens. Growth is fueled by two spectacularly successful billion-dollar drugs, Epogen and Neupogen, and four new products are slated to be launched over the next three years. Betting on a biotech bounce makes sense for traders.