Sorrento Therapeutics (NASDAQ:SRNE) finds itself in the speculative heart of the global pandemic. Investors are throwing dough at the little-known biotech company in hopes of cashing in on the epic demand for a novel coronavirus vaccine. Some have been rewarded for their bravery, while others have been burned by the insane volatility of SRNE stock.
When it comes to rolling the dice on small biotechs — particularly those in the race to profit from the novel coronavirus vaccine — you ultimately have one of two choices. In today’s article, we’ll explore both paths and help you make a more educated decision.
The first option is to bet small and let it ride. Holding a small enough position allows you to live through the inevitable twists and turns that will arise, so you can get the pot of gold at the end of the rickety rainbow. So far in 2020, SRNE stock has been cut nearly in half on four separate occasions. And the worst of those episodes saw the fledgling biotech lose 70% in a little over a month!
That’s not the type of drawdown you can stomach if a large portion of your account is riding on it. After all, what good is it if Sorrento Therapeutics rises to the moon over the next few years if it’s so volatile along the way that you get knocked out?
The key to enabling yourself to ride the roller coaster is sizing your bet small enough.
Bet Small in SRNE Stock and Settle In
Throwing 40% of your account in SRNE and letting it ride for the next year isn’t investing — it’s gambling. You can say it’s a high-conviction trade all you want, but the truth is you’re taking far too much risk. If you believe in the company’s long-term prospects, then bet small and hold on tight. It will make it far easier to weather the wicked volatility hounding the stock until its potentially promising pipeline of drugs finally comes to market.
At the current price of $7.09, Sorrento is 63% off of this year’s high. If you think a revisitation of the peak is possible, then there’s a great deal of potential upside. It will probably need some type of catalyst to arrest the current decline, however. Ever since the Sept. 29 peak that carried the stock past $12, interest has dried up considerably. During the low-volume spell, prices have been trickling consistently lower.
The last earnings report in August provided a shot in the arm to the stock. Time will tell if the next quarterly announcement can generate a similar boost. One big difference is the stock’s technical posture. It was in an uptrend and experiencing heavy accumulation ahead of last quarter’s event. This go around, it’s in a nasty downtrend with nary a whiff of institutional buying.
And that brings us to your second path.
Tactical Trend Following
If your timing is right, the excessive volatility can work to your advantage. When a stock quadruples in value, as SRNE did between May and August, it generates rapid-fire profits for those on the right side of the move. The trick is to exit stage left before trend-killing distribution arrives.
To that end, the alternate choice for playing Sorrento Therapeutics is to wait until the wind is at its back — then buy. In other words, wait until it climbs back into an uptrend above the 50-day moving average and shows high-volume up days returning. Then, play it long with a stop loss below key support zones like you would any other short-term tactical trade. If we get another run like in the summer, you could be in for handsome profits.
With SRNE wallowing in the mud deep below its major moving averages as I type, now is a time for patience for those following this second path. At a minimum, we need to rise back above $9. Until then, steer clear.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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