Investing in biotech companies requires a lot of faith and courage. It is not easy to risk assets into a stock on faith that their research will deliver viable results. This clearly makes ImmunoGen (NASDAQ:IMGN) a momentum stock. This makes it difficult to trade because on the way down, it seems headed to zero. But therein lies an opportunity.
While the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) has been flirting with all-time highs for months, IMGN stock has fallen off a cliff. This year, the IBB is up 14% while IMGN is down 44% for the same period. It is now as close to its lows as the sector is to its highs.
Clearly there is little hopium left in the stock price. Buying it here resembles a lotto ticket. I emphasize the word bet, as this is definite more gambling than investing.
However, buying a stock with a cheap sticker price like IMGN doesn’t mean it is cheap from a valuation perspective. Meaning that even though the stock has a $2.70 face value, I could still lose 100% of my money.
So, How to Play IMGN Stock
If I already own the shares, it’s probably too late to sell them now, but that also depends on the investor time-frame and thesis on IMGN. Adding new positions here would require me to have new information to do it with conviction. This chart is too ugly for me to buy without inside information or new fundamental reasons to expect a rebound.
This is a knife that I don’t want to catch for an investment thesis. But there is room for speculation in some portfolios, so I understand the attraction to bet on better days to come for IMGN stock.
Those looking to gamble on a rebound need to plug their nose and take small position. Or better yet, use the options markets to buy calls or call spreads. There, I could make it a small investment with a huge upside percentage gain. Options offer a much bigger bang for the buck than buying the underlying equity outright.
After this year’s February cliff, ImmunoGen stock is coming into the earnings event next month from rock bottom. Half of the Wall Street expert analysts still rate the stock as a buy with an average price target that is more than double its current value. So they must still see value in holding on to the shares for now. While this alone is not a reason to buy the shares, clearly these analysts have reasons for sticking with their optimistic outlook even as though price approaches zero.
I never assume that I am catching absolute bottoms in any stock I trade, so I don’t take a full-sized position. Since clearly IMGN stock is not a viable investment thesis yet, any long position here is more hopium than conviction. So I would keep the size small so that it doesn’t break the heart or the piggy bank.
ImmunoGen stock has been trending down for five years, so there is no reason to assume it can flip on a dime. Moreover, the equity markets in general are also near all-time highs, so it’s likely that IMGN stock could have more macroeconomic downside pressure from a correction.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.