Who says momentum investing is dead?
There are those that say the partying of 2013 will end with a hangover in 2014. Leading the way lower or at best sideways will be the former momentum stocks of last year.
What a bunch of party poopers.
One sector where those with a proclivity to risk will have their fun is the biotech industry.
Case in point is Intercept Pharmaceuticals (ICPT). The little biotech company specializing in treatments for liver disease exploded in a wave of momentum last week.
The stock jumped an amazing 500% in just two days of trading after reporting encouraging trial results for its OCA drug.
Talk about the Holy Grail of momentum investing. The Intercept story is so impressive that not even a whack of 35% or more the next week can knock the bloom off the rose.
Now the hunt is on for more. Investors are scouring the biotech landscape looking for the next Intercept. The action is sure to bid up shares across the board.
Given that predicting monster drugs coming to market is a crapshoot at best, investors can either gain exposure to the group with an exchange traded fund or roll the dice on a select few biotech stocks.
If you want to swing for the fences, here are three names in the biotech space that have the potential to attract the momentum investors in a big way.
Regeneron (REGN) shares could see a big jump in 2014. The big promise in the year is with respect to expansion of its eye treatment product, Eylea. Analysts expect the company to grow profits by more than 50% in 2014. At current prices shares trade for 54 times 2014 estimated earnings. That’s a rich premium, but not nosebleed compared to some momentum stocks. The real potential for growth to be even larger than expected is what turns on the momentum ground and as other rocket ships come back to earth look for this one to keep on climbing.
Like Regeneron, Questcor (QCOR) should benefit from the growth of an existing product, Acthar Gel. This one took a pause at the end of year on questions surrounding marketing practices – specifically improper payments to doctors.
Putting that aside for a moment, the value here is compelling. Analysts expect the company to grow profits in 2014 by 23%. At current prices, shares trade for only 8 times earnings.
What you ultimately have with Questcor are two very strong, opposing forces. Shorts will take questions about the marketing and claim fraud hoping to push shares lower. Longs will see further expansion of the company’s products and the low valuation. I’d bet on the momentum longs here.
Emergent Bio Solutions
If you are into “big game” momentum-hunting in the biotech space, make sure to include small caps in your search. To the extent a smaller company scores an approval for a key drug in a monster market, the gains would likely mimic what we have seen with Intercept.
I discovered Emergent Bio Solutions (EBS) when I ran my proprietary P/E Gap model at the end of December. Without getting into the details, P/E Gap identifies stocks that have the potential to rally based on being significantly undervalued.
Analysts expect Emergent to grow profits by 50% in 2014. At current prices shares trade for 21 times 2014 estimated earnings. The company is engaged in the defense industry developing serums for dealing with bio and chemical warfare. With the new budget deal, increased spending by the government will likely result in Emergent exceeding current expectations. If so, this one catches fire for sure.