In this post-novel-coronavirus year, most of the investor attention has gone either to the cloud or vaccine stocks. Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) are hogging the bids from the rest of the sector. Like this week PFE stock is getting love on Wall Street from their vaccine approval in the U.K. This leaves a lot of biotech stocks lacking the attention they deserve. While this is bad news for current holders of these stocks, it is an opportunity for new ones.
Today we will find three worthy tickers that have more potential upside than downside risk. The theme is simple, these are companies whose stocks are broken when the fundamentals are not. When a stock suffers a swoon, it eventually hits a level of support. More often than not they will then find love on Wall Street.
In the new era of Robinhood investing it’s easy to lose focus and follow the herd. This would then lead to mediocrity at best. The idea for successful investing is to find the gems before the hype catches on. I’ve found three biotech stock candidates that fit the bill. But this is by no means an all clear call to load up on all three. There is overall risk from the equity markets being this high. We can’t seem to stop setting records without the improvement in the fundamentals. If the markets correct then the bottom is not yet in for these three either:
Biotech Stocks to Buy: Boston Scientific (BSX)
BSX stock lost almost half of its value when the pandemic hit. Then like the whole market, it bounced back in a jiffy. It has since given back a lot of its gains, which could be cause for concern. This is especially true since the sector is still up so much. Year-to-date, the Health Care Select Sector SPDR Fund (NYSEARCA:XLV), iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) and SPDR S&P Biotech ETF (NYSEARCA:XBI) are soaring when Boston Scientific and the other two are down. So far, the argument I am making sounds more bearish than not. Next comes the good news.
Although BSX stock has not held its quarantine rebound levels, it still sits 41% above the March lows. Speaking of which, during the February crash the stock held at its prior support zone from 2019. The bulls defended the $24 levels very well and in the face of a formidable test. The events of 2020 are one of a kind and we are not likely going to see similar for decades. We’ve never closed the whole world all at once and for this long.
The negative reaction to the recent earnings is also good news now in hindsight. The selling happened on actual fundamental updates, so it already likely shook off all the weak hands. Those who still own the BSX shares have much stronger conviction. This by definition makes the downside scenario more finite. And if it can’t fall then the upside opportunity has time to brew. Ideally buyers will gradually step in to swing it higher to fill the gap near $37. There they will face strong resistance and through $39. But they can chip away at it for an eventual breakout. The ideal target would then be the upper end of the range at $41 per share. This won’t happen overnight so patience is key. I would trim profits at the gap fill area along the way.
From the weekly chart we can tell that the bulls are in charge of AMGN stock. It is setting higher-lows to establish an ascending trend. For as long as this is true then they will buy the dips. That has been the trend off the March lows but now they will face resistance going into $230 per share. The buyers will have to work hard to punch through the next $14 of upside. These are zones where the sellers will show up and it will be a slog.
Give it enough time and it’s possible they accomplish a 9% rally from here. Ideally, the breakout from $246 would bring an attempt to breach this year’s highs. But that’s definitely not the immediate goal. The bulls need to keep an eye on the prize on these front line resistances.
Furthermore, the lastest bounces in the stock have come from a solid base near $210. This is a pivotal line that has been in contention since 2018. The bulls can rely on it for ultimate support. Currently they are chipping away trying to make $219 the new support line. If they succeed, then that’s the base of our upside opportunity today.
AMGN stock is down 6% this year, so it has a lot of room to make up. It will need the help of the entire market because it can’t rally alone. All indications are that the bulls are not done yet, so I am optimistic about Amgen’s prospects.
BIIB stock is the cheapest of the three today by far. Its price-to-earnings ratio and its price-to-sales ratio are 50% cheaper than BSX and AMGN. Sometimes cheap is cheap for a reason and in this case time will be the judge on that. The price action on Biogen has been sheer lunacy. I accept that these biotech stocks are prone to headlines, but what happened last month was ridiculous. On Nov. 4, the stock spiked 40% then fell just as much on the an Food and Drug Administration headline.
This is definitely not normal price action and warrants concern. However, if we were to find some good news out of this, it’s the fact that it redefines the range. For the last seven years, BIIB stock has been ping-ponging inside a horizontal range between $220 and the highs. Last month’s flash rally and crash solidified re-framed the edges. Now these are the boundaries to watch for potential catalysts.
Consequently and for the next few months, when the stock falls to the lower end it would hold support. That’s where the bulls can swing it long. We are currently close enough to that so therein lies the opportunity. It makes sense to expect more upside into 2021 in a rising market. The exit point of this swing trade higher would be as BIIB nears resistance. It is too early to start talking about the upper end of the the seven year range. Besides, there are many lines of resistance starting at $256 and $270. If I get long here, I would trim along the way and exit at book profits at my $280 target.
Valuations are not a concern for any of these companies today. They have reasonable price-to-earnings ratios and are inline with the sector if not on the lower end. The upside potential will have to be on the back of chart triggers as the bulls beat milestones there.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.