It’s unequivocally a market made up of stocks. And nowhere is this more evident than in large-capitalization biotech stocks Celgene Corporation (CELG), Regeneron Pharmaceuticals Inc (REGN) and Biogen Inc (BIIB).
Monday’s headline incentive to “buy, buy, buy!” came courtesy of easing “Brexit” fears. But unlike a broader market near all-time-highs, brakes applied to nice-size, opening gains have kept biotech stocks CELG, REGN and BIIB near 52-week and multiyear lows and looking quite bearish.
Our advice however is not to let those classically bearish charts dissuade you from buying CELG, REGN and BIIB — and companies where growth prospects still look strong.
Remember, trends do end, and technical analysis in of itself is an elusive method for investing successfully.
Having said that, let’s examine the charts for CELG, REGN and BIIB and formulate a couple contrarian strategies. With the help of a limited-risk options strategy, we’re confident you’ll be ‘head and shoulders’ above the rest in these biotech stocks.
Great Biotech Stocks: Celgene Corporation (CELG)
It’s been nearly a year since shares of CELG hit their all-time-highs. And with Celgene stock down around 29%, the worst may not be over if we’re to believe in a head-and-shoulders top that’s developed on the biotech stock’s monthly chart.
The good news is that as investors struggle with foreboding price charts or perhaps dwell negatively on Celgene’s revenue reliance on its blockbuster cancer drug Revlimid, CELG looks like an opportunity for the contrarian biotech stock investor.
For starters, the Revlimid patent doesn’t expire for another decade. Sure, there’s always going to be competitive threats for CELG, but let’s face it, 2027 is a long time from now, and currently Revlimid is top dog.
Second, CELG also has billions in free cash flow to put to productive use like continued research, acquisitions and shareholder-friendly practices like buybacks and dividends.
What’s more, Celgene already has 18 or more late-stage clinical trials in the pipeline over the next two years and an on-par price-to-earnings multiple. Net, net — let the other trader fear the worst on and off the chart and get long CELG.
Reviewing the CELG options board and for shorter-term positioning, the August $105 / $115 bull call spread is attractive. Priced for $2, the max payout of $3 occurs if CELG can eventually trade above $115 at expiration.
That kind of move in CELG may not be so far-fetched given shares have enjoyed a bullish summer tendency. In the interim and if shares of Celgene do begin to chisel away at the near 16% required move, we’d look to establish a lower-to-no-risk long butterfly using a bear call spread adjustment.
Great Biotech Stocks: Regeneron Pharmaceuticals Inc (REGN)
Next up on our list of biotech stocks to buy are shares of REGN.
As with Celgene, Regeneron stock has formed a head-and-shoulders pattern. But in this instance, the formation in REGN is a bearish continuation pattern — and the neckline has been violated!
But don’t be fooled by the chart in REGN or take its authority too seriously.
At the end of the day, this biotech stock could always play out as some bullish variation of a double bottom and reverse higher, rather than forge a bearish resolution towards the $300 area.
Even better, REGN is already very profitable and could potentially grow from having one to four $1 billion plus blockbuster drugs on market by next year treating rheumatoid arthritis, eczema and cholesterol.
Again and as with other biotech stocks, there’s always the threat of competition infringing on its products. Nevertheless and without getting too tied up in “what ifs,” the downside in REGN looks limited.
Looking at REGN’s options board and the even better news is the downside for bullish investors truly is limited with a strategy like the August $380 / $400 bull call spread.
Priced for $5.50, risk on this strategy is less than 2% of REGN’s stock price per spread. A max gain of $14.50 is possible at expiration above $400. As with CELG, we also like the idea of adjustments / taking profits along the way, if Mr. Market cooperates.
Great Biotech Stocks: Biogen Inc (BIIB)
BIIB is our last biotech stock to own now. Despite a recent failed phase 2 trial for its multiple sclerosis drug opicinumab, an existing product stronghold in that disease and potential treatment therapies in other neurological disorders should wind up supporting Biogen.
Shares of BIIB offer investors solid financials and future growth coupled with a below-market multiple. In fact, Morningstar recently noted BIIB trades at a steep discount to its fair value model estimate of $356.
Looking at the BIIB chart, I’ll be the first to confess this strategist obviously misread BIIB’s price intentions at the beginning of June.
This biotech stock has gone from developing a nice uptrend following a lengthy corrective move to narrowly undercutting its prior three-year low set in February.
Our view is BIIB has enough going in its favor to anticipate the current double bottom will hold. But if support does fail in this biotech stock, $200 to $210 could be in the cards based on a 62% retracement dating back to the financial crisis lows.
Regarding an options strategy for this biotech stock, I like the bullishly positioned August $250 / $270 / $290 call butterfly for $3 in BIIB.
The BIIB butterfly has an expiration profit range from $253 to $287 and a max return of $17 at the sold $270 call strike.
As with the other biotech spreads, we’d look to reduce or lock in profits along the way if BIIB begins to climb higher. This makes extra sense as the butterfly is slow to bear substantial profits — and when they do, those gains can be quick to disappear.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.