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Bird Flu 'Investing'


...the investment potential of bird flu issues does not lie in the hope that a pandemic actually occurs.


Editor's Note: More on Avian Flu from Minyanville :

Mad cow disease, swine flu, anthrax, West Nile virus, Lyme disease, SARS… and now Bird Flu – is it just the latest in a string of worldwide medical hysteria or do we really have something to worry about?

We decided to do a little research on the subject to flesh out the particulars and get a feel for the possibility that the interest in the investment side of the issue has already passed its peak.

The dictionary defines pandemic as: "an outbreak of a disease occurring over a wide geographic area and affecting an exceptionally high proportion of the population." (Source: Merriam-Webster)

The investment "potential" in stocks that have, or might have, something to do with bird flu is of interest because of the dire threat that bird flu poses. It's neither an asteroid plummeting toward the planet nor reconstituted dinosaurs that might once again roam the earth. In Michael Crichton fashion, it has the potential of an Andromeda Strain type of biological threat to the world population – a fact that has mobilized a juggernaut of world wide concern and action.

It would seem that the investment potential of bird flu issues is a function of how concerned and how active the world's leaders become. Let's take a look at some facts.

How did this bird flu thing get started anyway? Actually, bird flu, or avian influenza, according to the CDC is "caused by avian influenza viruses, which occur naturally among birds." The CDC adds: "(on the other hand) pandemic flu is flu that causes a global outbreak, or pandemic, of serious illness that spreads easily from person to person." They hasten to add "currently there is no pandemic flu." To find out the specifics of the origins of bird influenza, visit this site.

There have always been bird influenzas of varying types. The current wave is a strain called the H5N1 virus. It is 100% lethal to chickens. It is 50% lethal to humans. Humans can make efforts to isolate themselves from bird populations as a precaution. According to the World Health Organization, as of mid-February the H5N1 virus is in the "third of six stages with a new subtype causing disease in humans, but not as yet spreading efficiently and sustainably among humans." Out of 169 total known human cases of contracting the virus, 91 have died.

The key to the current fears about H5N1 remains its ability to affect humans, and the possibility that the strain may mutate into a virus that can be passed from one human to another. In that instance, humans will begin to isolate themselves from other humans, causing extreme behavior: shutting down transportation, workers would be unwilling to go to the workplace, basic human services would cease – indeed governments would have a hard time operating. Needless to say this scenario is thankfully unlikely, and most likely will never come to pass. This is especially true given that whatever precautions are made, the likelihood that a mutated H5N1 virus could be stopped in its tracks is poor.

That said, the investment potential of bird flu issues does not lie in the hope that a pandemic actually occurs. As my good friend Jon Markman recently commented on the worst case scenario:

"So many people will be infected and killed that it won't really matter which stocks you own, since international trade will collapse. You'd be better off buying put options on the big indexes -- highly leveraged bets against the market -- that will make you rich if there's anyone to collect from after pandemic ravages Earth."

The investment potential lies in how hard governments work to prevent the virus and how hard they prepare to battle it if it does appear. As the H5N1 flu travels around the world with the migration of various flocks of winged creatures, the crisis management factor will spur governments to take more action. This appears to be happening as we speak. Finland has ordered from the Dutch group Solvay Pharmaceuticals 5.2 million vaccine prototypes against bird flu, enough to cover its entire population. To keep a day-to-day tab on such developments, click here and here.

Before we get into the specifics of bird flu investing issues, please be warned. There is a lot of snake oil out there. The touting of stocks and other schemes related to bird flu seems to be in its own little pandemic. It is so bad that the NASD has addressed it directly. For more info on that, please visit this site.

A Review of Bird Flu Stocks

There are 23 issues in our universe that clearly have a stake in the development of preventative and retaliatory measures against the H5N1 virus. We have added these as a screen in the Library section of Erlanger Chart Room, so that you can keep abreast of our rankings and other data on these issues on a daily basis.

Some of these issues have already attracted attention of investors with regard to bird flu fundamentals. In fact some have pulled back from an initial run-up last year. We suggest following these on an ongoing basis and consider whether you should buy a few for your portfolio as they rally from corrections. Here are the 23 issues ranked by Seasonal Juice 20-day Look Ahead:

We define Seasonal Juice 20-day Look Ahead as follows: By compositing the historical years of a stock into one linear curve, a seasonal cycle is born. Our seasonal cycle ranges from 0 to 100. On any given date, since we know the seasonal cycle for each year at the beginning of each year, we can calculate the seasonal "juice" for a stock at any moment in time. These "juice" numbers are simply the seasonal cycle for a particular stock 20 trading days from now minus the current seasonal cycle value. The higher the number, the more sharply the seasonal curve rises over the next 20 days. The more negative the number, the more sharply the seasonal curve falls over the next 20 days

There is a mix of well established companies, and companies that have tiny capitalizations and only the prospects of a profitable balance sheet. Below are a few of these that are noteworthy (but not necessarily buy recommendations):

Quidel Corporation (QDEL) engages in the development, manufacture, and marketing of point-of-care (POC) rapid diagnostic solutions for infectious diseases and reproductive health. There is talk that they are developing a home test for the bird flu strain. Stock price has moved up in the recently weak seasonal period. Short selling has grown enough to push our Power Rank into the green (short squeeze) zone. Seasonality is strong into June.

Gilead Sciences, Inc. (GILD), a biopharmaceutical company, engages in the discovery, development, and commercialization of therapeutics to patients suffering from life-threatening diseases primarily in the US, and is the most often mentioned name we have found when searching for bird flu issues. Short selling is light – no one wants to short the goliath in the bird flu industry. Seasonality is strong into June.

Crucell N.V. (CRXL) engages in the discovery, development, and production of various biopharmaceutical products for the prevention and treatment of infectious diseases using its proprietary technologies. Stock price has moved up sharply over the past 2 weeks as it heads into a strong seasonal period. There is sufficient short interest to feel the squeeze underway.

AVI BioPharma, Inc. (AVII), a biopharmaceutical company, engages in the development of therapeutic products based on NEUGENE antisense technology. Its principal products in development target life-threatening diseases, including cardiovascular disease, infectious disease, and cancer. Price has jumped above its DMA (displaced moving average) channel in line with its positive seasonality for April.

Novavax, Inc. (NVAX), a biopharmaceutical company, engages in the research, development, and commercialization of products for women's health, infectious diseases, and cancer. Stock price has come a long way since September (a three bagger), but short interest has dwindled and seasonality is weak over the next few months.

No positions in stocks mentioned.

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