By Michael Brush
Corporate sentiment has jumped to record highs since 2004, according to content analysis of earnings calls by Bank of America’s Predictive Analytics team. Thanks to a combination of government stimulus and lockdown restrictions on consumer spending, the U.S. personal saving rate has nearly doubled to 13.7%, notes Capital Economics.
Now it might pay to take a breather and wait for the economy to catch up. That’s what Nasdaq company insiders are telling us. The insider selling on Nasdaq is heavily weighted toward companies in cyclical sectors. There’s been significant selling in banks and financials like Goldman Sachs /zigman2/quotes/209237603/composite GS +1.34% , Interactive Brokers /zigman2/quotes/208880397/composite IBKR -0.03% and Morgan Stanley /zigman2/quotes/209104354/composite MS +1.00% . We see it in construction and materials names like Construction Partners /zigman2/quotes/200500291/composite ROAD -4.71% , Masco /zigman2/quotes/202412472/composite MAS +1.23% and U.S. Concrete /zigman2/quotes/205491558/composite USCR +5.05% .
Selling is prevalent in industrials like Agilent Technologies /zigman2/quotes/207081878/composite A +1.13% , Jabil /zigman2/quotes/203847835/composite JBL +3.81% , Navistar /zigman2/quotes/202415816/composite NAV +0.16% , Mercury Systems /zigman2/quotes/204481634/composite MRCY +1.12% and Patrick Industries /zigman2/quotes/205331557/composite PATK +1.36% . And at retailers like 1-800-Flowers.Com /zigman2/quotes/204552624/composite FLWS +6.33% , CarMax /zigman2/quotes/204412041/composite KMX -0.23% , PriceSmart /zigman2/quotes/208368434/composite PSMT -2.31% , SelectQuote /zigman2/quotes/218577027/composite SLQT +1.59% and Wayfair /zigman2/quotes/201071690/composite W +6.77% .
No. 4: Interest rates are going up
We think of the Nasdaq as technology, but a lot of the heavy insider selling has happened in biotech. The selling makes sense if you think interest rates are going up, which will be the case, in my view. What do biotech names have to do with interest rates?
Biotech earnings are heavily weighted into the future. To value the stocks, you have to discount those earnings back to the present using net present value models. The discount rate used is typically the 10-year Treasury yield. So as that continues to rise, the present value of future earnings decline, because they are being discounted more heavily, cautions Jefferies biotech analyst Michael Yee.
Of course, biotech bulls think the developments in their companies will offset the damage. There are so many interesting breakthroughs playing out in biotech right now in areas like gene editing and the manipulation of how cells communicate with each other, they may be right.
But it is hard to ignore the prevalent sector selling in names Adaptive Biotechnologies /zigman2/quotes/212846591/composite ADPT -4.40% , Arena Pharmaceuticals /zigman2/quotes/200715023/composite ARNA +2.73% , Crispr Therapeutics /zigman2/quotes/201181046/composite CRSP -0.13% , Fate Therapeutics /zigman2/quotes/209623007/composite FATE -0.08% , Jounce Therapeutics /zigman2/quotes/210277760/composite JNCE +2.90% , Moderna /zigman2/quotes/205619834/composite MRNA +1.65% and Replimune /zigman2/quotes/203971249/composite REPL +0.96% .
The bottom line: You need to choose your biotech names very carefully now. Go with ones that have enough developments coming to power through any sector weakness caused by rising interest rates. One I’ve recently suggested in my stock letter around current levels is AbCellera Biologics /zigman2/quotes/201916617/composite ABCL +1.36% , a cutting-edge company that uses artificial intelligence to help discover therapies.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned CCL, BAC and ABCL. Brush has suggested DELL, FB, CCL, DIS, CZR, BAC, GS, MRCY, FATE and ABCL in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.