Ebola paranoia is spreading the country. At least, it’s spreading a lot faster than the actual Ebola virus, which is still limited to two total cases in the United States. Cable news stations are giving the story enough coverage to make one think the entire world is ending, though, so it’s hard to avoid the story.
The markets, however, are supposed to at least hypothetically be where rationality presides. Sure, the general public might be whipped into a frenzy of fear, but the level-headed capitalists won’t be swayed by such nonsense. I know, right? Hysterical.
Once again, any semblance of market rationality appears to be right out the window as Ebola fears seemed to cause some pretty drastic swings in the valuation of several companies.
Ebola Stocks Having a Heyday
The last two days have been of note for three companies in particular: iBio (IBIO) , Alpha Pro Tech (APT) , and Lakeland Industries (LAKE) .
Alpha Pro Tech and Lakeland Industries both make hazmat suits that health care workers need to wear while treating Ebola patients. Both companies are way up since the first US cases were confirmed, and both had banner days on Monday, with Alpha Pro Tech up over 35% and Lakeland gaining over 45%.
Tack that onto the huge gains both companies started making since the news hit that Ebola had appeared in Dallas. Since October 1, Lakeland has more than quadrupled in value while Alpha Pro Tech has more than tripled.
Makers of Protective Clothing, Gear are on the Rise
So why are these two makers of protective gear taking off like this? Sure, there could be much more valid reasons than simple Ebola paranoia. The outbreak in West Africa remains very severe and is likely not going to be halted for months yet, meaning an influx of funds from Western countries to help buy desperately-needed supplies like hazmat suits. Even if fears of some sort of outbreak here in the United States are bogus (and boy are they), investing in companies like Lakeland and Alpha Pro Tech could still make a lot of sense.
Except that, if investors and traders were making said wise investments without basing it on Ebola paranoia, they sure found a pretty funny timeframe to invest on. So, the Ebola outbreak itself actually started in December of last year in Guinea and slowly picked up momentum. By July 18, Doctors Without Borders had called the epidemic “out of control” and the World Health Organization now regarded the outbreak as “serious” because of 67 new cases and 19 deaths.
While the scale the outbreak has now reached may come as some shock, it’s worth noting that the speculation based on the outbreak remained pretty limited during the first seven months of this. Alpha Pro Tech, for instance, gained a whopping 5% from the start of December to the end of July while Lakeland was up just under 15%.
Once the outbreak started growing rapidly, Alpha Pro Tech started to take off, gaining over 55% in the two months from the end of July to the end of September, just before the first US case was reported. Lakeland, though, jumped just over 8.5% during that same period.
However, the stock’s performance since the start of October would seem to make it clear that, for however much shrewd investment might be at play with these two companies, wild speculation based on spreading Ebola fear appears to be driving a lot of the buying. Alpha Pro Tech tripled in value in just two weeks, going from about $3.50 a share at the opening bell on October 1 to hitting its 52-week high yesterday at $10.73. Lakeland, meanwhile, more than quadrupled in value.
It came to a head on Monday, the first trading day after it was revealed that a Dallas nurse, Nina Pham, has contracted the disease while caring for the initial patient, Thomas Eric Duncan. Lakeland spiked just under 50% and Alpha Pro Tech was up over 35%.
So it’s really hard to see that sort of massive upswing in valuation that corresponds so closely to the growing fear Stateside as being a coincidence. Sure, a lot of this is likely coming from momentum traders and the theory of the Greater Fool, but the catalyst is clearly in those two cases in Dallas.
Shares Fall on Tuesday
Of course, Monday’s speculative feeding frenzy was followed by a pretty predictable rollback, with Lakeland down over 25% and Alpha Pro Tech off just under 25%. In both cases, it meant the majority of the previous day’s gains were erased.
The pullback on Tuesday was attributed by some to statements from the WHO that indicated that new cases were declining in some of the worst-affected areas. However, that seems like a bit of a stretch, especially considering that the WHO statement was actually pretty sobering and predicted that as many as 10,000 new cases a week could be reported by December.
Either way, these sorts of wild swings in valuations, especially when they appear to be tied to the notion that an American Ebola outbreak is going to be what’s driving new business, certainly don’t carry with them a sense that the Street is acting rationally, even for companies this small. Lakeland features a market cap just shy of $125 million while Alpha Pro Tech is just under $145 million. At least for now that’s the case. Check back tomorrow and it seems entirely possible that it’s going to be very different.
iBio Stock Swings on Rumor
Of course, adding an extra layer to apparent Ebola-motivated irrationality would be the price action of iBio, a biotech company that develops vaccines and and therapeutic proteins.
Like Lakeland and Alpha, the company is up a lot on Ebola news. Since December, it’s more than sextupled in value. However, from December to the end of July the stock actually lost 1%. August and September saw the stock climb over 20%, then things went really nuts in the first two weeks of October with the stock falling just short of a four bagger (up 298.5% from October 1 to yesterday).
And that’s not even really telling the whole story. The majority of that spike came in just two trading days, Friday and Monday. It tripled in value during those two trading days on a rumor that iBio was a manufacturing partner for Mapp Pharmaceuticals, the company that produces ZMapp, an experimental drug in development that was tested in West Africa and saw positive results.
The rumor may or may not be true. Caliber Biotherapeutics and iBio partnered in February of last year to use iBio’s proprietary iBioLaunch technology in the manufacturing of drugs. So, when it leaked that the government was in talks with Caliber to help Mapp Pharmaceuticals ramp up production of ZMapp, speculation on iBio stock shot through the roof.
However, as some have pointed out, the ZMapp production involves using genetically modified mammalian cells from the ovaries of Chinese hamsters (speaking of irrational fear, that sentence is terrifying) while iBio’s site states that the company works with a plant-based platform. Developing ZMapp, a drug that combines three monoclonal antibodies, does involve injecting a virus into tobacco leaves, though, so it’s hard to say.
Either way, the company suffered a huge setback Tuesday, much like its compatriots in the Ebola space. Shares tumbled nearly 50%, meaning that after the massive run of the two days prior that took shares as high as $2.73 apiece for a new 52-week high (and a new 128-week high, give or take), the stock was back under $1.30 a share. That’s still about double where it was prior to Friday, but certainly a sign that one shouldn’t take its newfound valuation without a serious grain of salt.
Ebola Stocks May Not be Healthy in Long Run
Certainly, the current Ebola epidemic doesn’t appear to be going anywhere anytime soon. There are some tremendous obstacles to a coordinated-treatment effort in West Africa and it’s going to require a sustained and concerted effort from the international community that kicks off immediately to prevent this from becoming a far greater humanitarian disaster than it already is.
However, as for market speculation based on those companies that appear to have any sort of relation to Ebola treatments, it’s hard to see this as being sustainable. Suddenly, micro- and nano-cap companies are dramatically spiking in value and doing so at times that appear to indicate that the new valuations are based in part on the potential for an outbreak here in America.
So does this mean that if (when) the few isolated cases in the United States remain just that, few and isolated, these stocks are going to come crashing back to earth? It seems entirely possible. Because even if there are real reasons for these stocks to be on the rise, and there certainly appears to be, the level to which they’ve risen also seems to have a lot to do with wild speculation based on irrational fear. Certainly circumstances that could make a smart options trader to make a fortune in the short run, but possibly ones that also make a buy-and-hold approach less than prudent at the moment.