Biotech stocks have been on a tear lately, with the SPDR S&P Biotech (ETF) (NYSEARCA:XBI) outrunning the S&P 500 about 45% to 10% over the past 10 months.
Click to Enlarge And momentum still is on biotechs’ side, with 57% of the XBI’s components trading above their respective 50-day moving average. For perspective, the S&P 500 only boasts 41% on that front, and the Dow Jones Industrial Average only 33%.
One of the older rules on the Street is that you shouldn’t “fight the tape.” Still, a growing number of short sellers are initiating bearish positions on these stocks. And any student of our approach knows that we love to see rising short interest on a technically strong stock or sector because it indicates the likelihood of a short squeeze rally.
Our proprietary ETF Weighted Short Interest Ratio ranks the XBI’s companies as the second most shorted group in the market. In fact, the positive breadth, technical strength and large outstanding short positions on the XBI’s stocks puts the fund within our top three ETFs to hold during the first half of 2015.
So, how can you profit off this strength? For one, you can just buy the XBI. Besides beating the market by threefold over the past year, XBI also has been less volatile than the broader market over the same period. That means you’re generating alpha and reducing risk.
But if you’re interested in buying a few individual companies, here are three biotech stocks that stand out right now.
Biotech Stocks to Buy: Myriad Genetics, Inc. (MYGN)
Click to Enlarge I can’t tell you what’s going on inside the walls at Myriad Genetics, Inc. (NASDAQ:MYGN), but something’s on the horizon given the activity by the short sellers and in the options pits.
MYGN is ranked a “buy” according to our Behavioral Valuation Models, but this is one of the largest potential short squeeze situations out there, with 50 times its daily volume outstanding as short positions.
Watch for a break above $35.50 to spark a rally in this biotech name.
Biotech Stocks to Buy: Theravance Inc (THRX)
Click to Enlarge Lesser-known Theravance Inc (NASDAQ:THRX) is on our radar of biotech stocks to watch given the potential for a break back above $20.
The bears have sold short shares at 20 times THRX’s daily volume, meaning that one heck of a short squeeze rally is brewing here.
Ranked a “buy” by our Behaviral Valuation Models, we see THRX stock leading biotech stocks higher.
Biotech Stocks to Buy: Genomic Health, Inc. (GHDX)
Click to Enlarge Genomic Health, Inc. (NASDAQ:GHDX) has been slumbering lately, trading in a tight range between $30 and $34. Well, the trend is slowly pressing GHDX higher, indicating another run at a break above $34.
This time, the short interest ratio for the stock is more than 31, meaning a break higher is set to shake the shorts violently.
Our model targets a fast move to $36 for GHDX.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
