Is biotech a buy, sell or hold? The answer is that depends. But in this strategist’s view and in paying homage to the price charts of Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Amgen, Inc. (NASDAQ:AMGN) and Celgene Corporation (NASDAQ:CELG), there’s evidence all three recommendations exist.
There’s also supportive evidence off the charts to buy, sell or simply maintain a more lukewarm bullish opinion on REGN, AMGN and CELG, respectively. Personally, analyzing biotech stocks like that is a tough business.
Due to patent protection, expirations, breakthroughs, competition, generics, FDA approvals, trials, failures, marketing and distribution, pipeline speculations and the likes, even the best sounding information today, rarely seems to pan out consistently for analysts committed to figuring it all out. This is just one person’s opinion, but having been around the financial markets for more years than I dare say, I’d love to have hard evidence to the contrary as it relates to biotech stocks.
Having said that, if you’re willing to set aside some capital for speculating in the group and like the idea of diversifying in biotech stocks with a buy, sell and hold using limited risk options strategies, then REGN, AMGN and CELG are prime candidates I’m willing to share with you today.
Biotech Stocks #1: Regeneron Pharmaceuticals (REGN)
Click to Enlarge Wall Street has been growing increasingly optimistic of Regeneron’s prospects. And there’s been a couple good reasons off the chart to suggest why. Shares of the biotech stock enjoyed a “better-than-feared” earnings reaction last month, which jumpstarted the renewed interest in REGN.
From there, Regeneron has picked up more investor support. There appears to be growing expectations the company has a new blockbuster drug in-the-making and possibly gaining an advantage in its cholesterol drug battle with Amgen.
The price chart of REGN is confirming investors’ enthusiasm, as shares have quickly moved into a position of relative strength the past couple of months. The weekly chart of Regeneron also shows the biotech stock is trying to clear some critical resistance. Shares of REGN are retreating modestly after an initial punch through the 50% retracement level of its two-year corrective base and slanted triple resistance line.
Reviewing REGN’s options, a bullishly targeted and modified long call butterfly looks attractive considering our bullish outlook. Recognizing if the current pullback continues, however, puts all the technical work accomplished at risk. With shares near $459, the July $480/$500/$510 call spread is priced for $3.10.
In buying the spread the trader is guaranteed a profit at expiration if shares begin to reassert their strength and trade above $483.10. Below the $480 strike and ultimately the .07% of stock risk associated with the cost of the spread is forfeited. A max profit of $11.90 exists at $500 and where potential resistance from the 62% retracement level comes into play. And should shares burst higher, unlike a regular butterfly, $5.90 in profit above the spread structure is guaranteed.
Biotech Stocks #2: Amgen (AMGN)
Click to Enlarge Did I mention Amgen? I did and things at the moment don’t appear to be coming up smelling like roses for the biotech giant. Near term, it looks like a sale or a short off and on the price chart.
Aside from the possibility of Amgen losing ground in its cholesterol fight with Regeneron, some argue, does it even matter? Others have also recently argued trial setbacks and the company’s weak pipeline are not worthy of buying into at current prices.
Others agree on the price chart of this biotech stock. In our technical view, AMGN looks like a bearish short opportunity. The provided daily chart of AMGN shows a biotech stock that’s been stumbling of late. Relative weakness compared to the sector and a couple technical failures point to the possibility of shares heading even lower in the next couple months out a bearish-looking flag pattern.
Reviewing AMGN’s options for a strategy, I’m inclined to go with a bearish vertical. One that fits the technical situation without getting ahead of ourselves is the July $160/$155 put spread. Priced for $1.35 with Amgen shares at $162.20, the vertical will need price confirmation to build value by expiration. But should our flag pattern gain a few more advocates, that shouldn’t prove too difficult.
Lastly, as the max payout of $3.65 is priced above last month’s lows, this spread doesn’t require being too bearish either to profiteer handsomely while maintaining limited risk.
Biotech Stocks #3: Celgene Corporation (CELG)
Click to Enlarge Last up on our list of biotech stocks is Celgene. Unlike the “buy” recommendation for REGN or the “sell” on AMGN, CELG looks more like a hold to this strategist, or what I’d label a more lukewarm buy. Off the charts, there’s a bit of disagreement with the latest analyst note. The investment firm Leerink upgraded Celgene to outperform and inched up its price target from $146 to $150.
The upward revision is based on the biotech stock’s relative or discounted value compared to its peers, as well as the expectation there will be “significant upward revisions” to third-quarter estimates.
On the daily price chart of CELG shown below, shares do look more bullishly positioned than not, as they trade inside an ascending base pattern. And the weekly view does appear to support upside potential for this biotech as it trades inside the right side of a two-year corrective base.
Less terrific, bullish optimism right now is being tempered by CELG being “inside” these patterns and not yet showing signs of a breakout or price momentum — today notwithstanding.
As much and after looking over the CELG options board, a regular but targeted long call butterfly looks interesting. With shares at $122.10, the 14 July $121/$124/$127 spread is priced for 70 cents. If purchased, this CELG spread allows for profits at expiration within a healthy range of $121.70 to $126.30.
Outside the wings, the debit is ultimately lost. But with the next earnings cycle outside this spread’s lifespan, I like the idea of “holding on” for upside at a very low cost. I also don’t mind sacrificing upside given the current wall of resistance near $127.
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.