Don't be a swine-flu stock pig
Some traders have tried to cash in on swine flu fears by buying small biotechs and selling shares in Mexican companies. Most investors should avoid this game.
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| The broader market fell on fears of a swine flu pandemic Monday. But The Mexico Fund, a closed-end fund investing in top Mexican companies, really took it on the chin. |
NEW YORK (CNNMoney.com) -- Day traders, God bless 'em, will try and make money off just about anything -- even fears of a global swine flu pandemic.
Shares of several relatively tiny and unprofitable biotech stocks surged Monday and Tuesday while stocks of just about every company based in Mexico, the epicenter of the swine flu outbreak, plunged.
But if you are an average investor, you should steer clear of some of these more crazy bets -- which appear to be driven more by panic and greed than common sense.
Some drug companies probably will benefit from increased demand for vaccines if swine flu turns out to be a much more widespread health problem than it already is.
But should you really be taking a gamble on obscure biotechs like Novavax (NVAX), BioCryst Pharmaceuticals (BCRX) and Generex Biotechnology (GNBT)? Those stocks each rose nearly 80% Monday. The easy money's been made here and these are not stocks that anyone without a huge appetite for risk should own.
To be sure, some of these companies have some promising technology. In an interview with Reuters Friday, Novavax's CEO said his firm has been in contact with the CDC and could be able to make a vaccine from an emergent strain of flu virus within 12 weeks.
Who knows if this will still even be a story in 12 weeks? If swine flu turns out to be something more akin to the SARS outbreak in late 2002 and the avian flu scare in 2005 -- isolated incidents as opposed to massive epidemics like the 1918 catastrophe -- these stocks could come crashing back to earth fast.
All three companies are expected to post losses this year. And in that same Reuters story, BioCryst's CEO said his company's drugs were still in clinical trials.
A safer way to invest in companies that could see a boost in sales if swine flu develops into a bigger health crisis is to buy shares of proven drug companies.
British pharmaceutical giant GlaxoSmith Kline (GSK), which makes the antiviral inhaled drug Relenza, a medication that can treat swine flu, is one such company.
So is Swiss drugmaker Roche Holding (RHHBY), which makes the Tamiflu pill. American biotech leader Gilead Sciences (GILD, Fortune 500), which developed Tamiflu and receives royalties from Roche on the drug, could also benefit.
Turning to Mexico, it does make a certain amount of sense to expect that there will be a dip, at least temporarily, in travel to our neighbor to the south.
So the big drop in some Mexican companies was probably somewhat warranted, most notably the shares of publicly traded Mexican airport operators Grupo Aeroportuario del Sureste (ASR), Grupo Aeroportuario del Pacifico (PAC) and Grupo Aeroportuario del Centro Norte (OMAB).
But did shares of America Movil (AMX), the Latin American wireless giant controlled by billionaire Carlos Slim Helu, deserve to fall nearly 7.5% Monday? It's not as if Mexico is going into complete lockdown mode because of the swine flu? And even if it did, wouldn't people still use their cell phones -- perhaps even more -- because of the crisis?
What about Cemex, a maker of cement? Its stock also fell more than 7% on Monday. If swine flu doesn't wind up sending the entire global economy to a grinding halt, then Cemex is a company that should bounce back due to hopes that the U.S. economy is stabilizing. America is Cemex's biggest market, with more than 20% of Cemex's sales last year coming from the United States.
Two other relatively high-profile Mexican companies that appeared to get dumped Monday for no good reason other than being based in Mexico were television broadcaster Grupo Televiso (TV) and FEMSA (FMX), a brewer that is also the largest bottler of Coca-Cola in Mexico.
Think about it. If the swine flu becomes a more serious problem in the United States, would companies like CBS and PepsiCo be the first ones you'd think of selling in a panic because of how the swine flu would impact their businesses?
Now don't get me wrong, Monday's broad market sell-off wasn't totally irrational. That pullback seems justified: The stock market has been on a tear for the past month and a half and swine flu is actually a new development, unlike fear about bank stress tests and the crisis in Detroit.
There is a lot that is still unknown about the virus, which is scary. And anytime people's lives are at stake, it is understandably worth taking precautions.
But dumping some large, healthy companies solely because of their geographic location and making trades in small companies without a proven track record is just too risky for everyday investors.
This reminds me one of the first stories I ever did for CNNMoney.com back in 2001, in the wake of the terrorist attacks.
Shares of a tiny company called Vital Living Products had surged more than 1,500% from mid-September to late October as traders bet that the company, which rushed to develop a home water testing kit for anthrax following 9/11, would soon be selling the testing kits in retailers nationwide.
That didn't happen. A month later, Vital Living stopped marketing the tests after the FBI raided its offices and the SEC launched an investigation into the company. Vital Living was delisted in 2002.
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