“Biotech Stocks’ Rout Perplexes Analysts” is how the Wall Street Journal headlined the phenomenon. The Nasdaq Biotech Index had plunged 21% from its intraday high six weeks ago, to which it had ascended in an ever steepening curve that culminated in a beautiful spike. I wrote about that craziness at the time. My impeccable timing was, unfortunately, sheer luck, but the Biotech bubble had become so glaring that even I could see it [NASDAQ 10,000 – Or Something]. So it’s perplexing that analysts would be perplexed.
To add some color, the WSJ quoted ISI Group analyst Mark Schoenebaum: “Horrible day in #biotech. I’m frankly at a loss for an explanation. And it’s my job to at least know why. Humbling day.”
He has been a stock analyst following the Biotech sector since 2000. If he’d started three years earlier, he would have seen the bubble build, pick up momentum, go crazy, and pop in early 2000. He would have seen Biogen dive so fast so far it would have knotted up his stomach. He would have experienced the implosion viscerally. And he might not have forgotten – though many analysts have. But not having been through this before, he was “at a loss.”
And something is cracking.
Of the 14 IPOs planned for this week – the busiest since 2007 at the eve of the last implosion – five were postponed, pending better weather. But Farmland Partners started trading on Friday, and got plowed under. An hour before the close, it was down over 10% from its offering price of $14 a share. A last-minute rally brought it up to $12.98, for a loss of 7.3%.
“People are pretty nervous,” explained CEO Paul Pittman. “This is about building long-term value in an asset class that for all kinds of macro reasons we believe is certainly going to keep appreciating.”
That endlessly appreciating asset class is farmland. The company, which expects to get taxed as a REIT, doesn’t own or do much yet. But it’s gonna “acquire high-quality primary row crop farmland … throughout North America … upon completion of a series of formation transactions.” It’ll own 38 farms with 7,300 total acres, mostly in Illinois.
Farmland has been hot for long time.
Over the last 10 years, farmland prices in Iowa soared 282%, in Nebraska and South Dakota 326%. Over the last 6 months, prices still rose 7.2% in South Dakota, but in Nebraska they stalled, and in Iowa they started to fall, now down 2.8%.
Farmland has been through this before: in the 1980s, the bubble burst, and farmers who’d borrowed against their land at nosebleed valuations ran into trouble because crop prices couldn’t make the equation work, and they couldn’t service their debts and had to sell, which triggered more bouts of forced selling which drove prices down further and took rural lenders down with them. The scenario of any bubble that is unwinding. It wreaked havoc on rural America.
That Wall Street finally pushed a farmland REIT, willing to buy farmland at peak valuations, into the hands of retail investors, after a huge multi-year run-up in stocks and farmland, should send people scurrying out of the way.
“But it’s not a bubble.”
That’s what Savita Subramanian, Head of US Equity and Quantitative Strategy BofA Merrill Lynch Global Research, wrote on March 21. Then she went on to describe what exactly it was, namely a bubble:
We have witnessed a recent surge in media attention on the topic of equity bubbles, citing various signs of evidence: Biotech stocks have risen 300% over the past five years, and Internet stocks have returned more than 400% over the same period. And most IPOs this year have been for unprofitable companies trading at high valuations…. The recent sell-off in high-fliers has investors worried that the deflation of this “bubble” could take down the overall market, similar to what occurred in 2000.
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