Like golf, investing in biotech stocks can be cruel game. As Michael A. Gayed explains, the pricing dynamic of individual biotech stocks will often follow the perceived successes — or failures — of drug trials and the multiple approval procedures enforced by regulatory agencies.
This Wild West mentality is primarily the lure for investors hoping to score big, but it can often be the Achilles’ heel when rational strategies are not applied.
Why, then, are biotech stocks so volatile? In many cases, the fortunes of individual companies are riding on the marketability of a particular drug in the hopes of selling their proprietary research to a member of Big Pharma. However, the U.S. Food and Drug Administration outlines a very rigorous and complex series of proposals, clinical trials, and safety and effectiveness testing before a drug can be submitted for final approval. Between different stages of testing and approvals, smaller biotech companies are often scrambling to procure high-dollar investment support in an effort to keep cash flowing down the pipeline.
It’s no stretch to say that investing in biotechs can be feast or famine. However, much of the volatility can be controlled either by selecting stable, top-tier names or by applying quantifiable, evidentiary analysis toward more speculative companies.
Here are three such biotech stocks to look at as they approach their earnings reports.
Biotech Stocks: United Therapeutics Corporation (UTHR)
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One major factor contributing as a tailwind for United shares is the FDA’s conditional approval of the cancer-fighting drug Unituxin, which is engineered for patients suffering from high-risk neuroblastoma. In addition, the FDA granted an uncommon pediatric priority review voucher (PPRV) for neuroblastoma-specific cases, which would entail (among other privileges) the right for United to sell or transfer the voucher to other entities.
Such fundamentally strong news bodes well ahead of the company’s earnings report, which is scheduled to be released April 28.
Historically, United’s financial performances has been in line with Wall Street expectations. Over the last 16 earnings reports, the biotech firm has beat analysts’ forecasts 10 times, often by a wide margin. Given this positive trend and how well the share price has responded in recent quarters, the likelihood of another favorable showing seems fairly high.
From a technical standpoint, UTHR is one of the most statistically sound biotech names. Its average performance over the past 90 days is 9.61%, which may trigger fears of the stock being overbought. Instead, historical trends suggest a 77.5% chance that shares will move higher over the next three months, with an average return of 17.93%.
Biotech Stocks: AtriCure Inc. (ATRC)
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AtriCure’s claim to fame is the development of the cryoICE cryo-ablation probe, a surgical tool designed to treat cardiac arrhythmias and associated pains. It does so by allowing extremely cold temperatures to deliberately modulate tissue cells, and is the only FDA-approved cryo-ablation probe specific for cardiac arrhythmia cases.
Although its earnings performance over the past 16 reports have been mixed compared to United Therapeutics — having met or exceeded analysts’ expectations only 56% of the time — AtriCure’s last eight reports have shown a significant shift. Earnings results beat Wall Street estimates seven times, while the last reporting quarter was in line with expectations. During this streak, shares increased in valuation by approximately 114%.
Bullish investors will be hoping that when the next earnings statement is released on April 29, the built-up momentum will carry forward.
From a technical analyst’s perspective, there is reason to be optimistic. Since the global financial crisis of 2008, ATRC has been trading in a well-defined, upward sloping trend channel. Also, subsequent dips in the price action has been occurring at higher support levels. Admittedly, shares have had trouble breaking the resistance line, which currently stands at roughly $22, and is a cause for concern with the fine folks at Zacks Equity Research. However, with a five-week average performance of 1.86%, ATRC has broken through a month later 72.5% of the time when faced with similar technical conditions in the past.
Given its innovative product line and recent financial and equity trends, AtriCure is poised to become the next small-cap winner.
Biotech Stocks: Neogenomics, Inc. (NEO)
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However, this oncology laboratory and cancer-testing provider has been surprising many people with its strong showing in the stock market. In fact, the company’s recent trend earned a “buy” ranking from Zacks Equity Research, which cited potency in technical indicators.
In many ways, the price action of NEO is charting similar patterns as AtriCure. Both demonstrate a long-term bullish trend channel, with higher highs and higher lows. The key difference is in the current market posture: NEO is trading near the bottom of its channel whereas AtriCure is challenging resistance.
An optimistic way of interpreting this pattern is that NEO potentially has more room to rise.
Statistically, the picture is less clear. Given its five-week average performance of 1.09%, NEO has a 47.5% chance of moving higher over the next five-week period. That’s hardly encouraging since the other companies have an obviously bullish bias. The draw is that when NEO rallies, its magnitude of lift is over twice as high as its magnitude of loss (+12.57 vs. -6.08%).
The other dark-horse factor to consider is recent earnings performance, where the company has either met or exceeded analysts’ expectations over the past three earnings reports.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
