So far 2020 has dealt the world one surprise after another — none bigger than the virus pandemic. While this wreaked havoc on Wall Street, some segments benefited from the crisis. Atop of that list are online merchants like Amazon (NASDAQ:AMZN) and biotech companies. Co-Diognostics (NADSAQ:CODX) is one of the latter, and it shot up over 2,000% at its height. CODX stock is still up 1,800% year-to-date even after a big recent dip.
But first let’s frame it properly, because this is a only a $480 million market-capitalization company.
In February, the stock rallied from $2 to over $18, then gave back most of it. Then it spiked again, and this time almost $10 higher to almost $30 per share. From the February neckline, its increases were astonishing, but those who chased it at the top are down 40% on their investment.
The question now is if the ones buying it today are also going to be trapped.
If you listen to the experts on Wall Street, it is all roses from here. CODX stock has fans these days and their price targets are double of the current price. Clearly it was the stock has the wind in its sail and shorting it is a scary proposition. Even under normal circumstances the biotech industry is prone to headline pops and drops. The emotions from the ongoing virus crisis blow this out to even wider extremes. Management recently reported earnings and the news was positive.
They just started selling their Covid-19 testing kits. These should yield tremendous forward profits — if many assumptions about its future go right.
Jumping the Gun Is Okay for CODX Stock
Investors should buy it for the potential headline that should come a few months from now if at all. But caution is always warranted in both directions. The move will be binary and will certainly come in giant bursts.
Usually I like to chase a breakout after confirmation of a trigger, but in this case it is necessary to jump the gun. This is the case to anticipate with the positioning and hope for the best.
The reason for the high interest in the stock doesn’t need to make sense, much like why people chose to hoard toilet paper. We are humans and we suffer from the fear of missing out. FOMO is a price driver as real as the panic selling on the way down.
The truth is that out of the hundreds of companies vying for Covid revenues, there will only be a handful of winners. Investors need to be realistic with their expectations and pick wisely. This is why I would classify this bet in the biotech sector as speculative. This is nothing against the company, it’s just a rule I have for the sector.
Size the Risk Right
When the fundamentals are binary, it is easier to use the charts to find the levels to trade. For CODX stock, there is a clear pivot zone around $16 per share. This was where the bulls broke out and rallied 88% in early May. Unfortunately, they gave most of that back, but as they fall into the starting point, they should find footing. To that point, the bulls bought the breaches from $16 with force, leaving long tails below. This is bullish behavior because they are refusing to trade below it.
The onus is on the bears to prove that they can push the stock below the line that brought such a massive rally less than a month ago.
There is no use looking at the fundamental metrics of this company because there are none there. On paper its stock price is 188 times its total sales. But when it comes to betting bullish on such scenarios the upside is all hopium.
To go long CODX stock now, even with the Covid-19 still ongoing, is not any less risky than any other time. This speculative trade should be relatively small in size because of the gambling element it possesses. Once a vaccine comes to market there will be less need for testing. People will get the shot and not worry as much about the rest.
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.