Before we contemplate going long stocks we should first establish the fact that there is macroeconomic risk. You might not be able to recognize that because just this minute the indices are breaking records. These are not circumstances that warrant such behavior and this time it’s different. High stock prices are masking terrible economic conditions in the world. The astonishing rally from last March’s lows has gone too far. No, it is not time to short stocks, but it is definitely time to be picky about what we chase. Within that environment, we should find relative bargains to buy but with caution. Today we examine three biotech stocks that have upside opportunities.
Finding bargains in this very bullish market is near impossible. We want to avoid the ones that are falling for good reason. The idea is to find gems that other investors missed. Picking bottoms as they call it is not always a slam dunk. Often you get stuck with garbage. The indices charts have gone parabolic, and that’s not typically a base for easy upside. Healthy stock market rallies should have bearish stints. That’s when investors let pressure out to avoid big blowups. The longer we go without one, the greater the danger for something to happen.
These sharp rising wedges on Wall Street could spell trouble soon. The bulls need to rest a little so they can establish firmer ground for more upside. These three stocks have already let their steam out, so they have little fat left to lose. They won’t have too far to fall from here.
Novavax (NASDAQ:NVAX) is up 4,000% in a year, the three biotech stocks we propose today are not:
Biotech Stocks to Buy: Pfizer (PFE)
Pfizer stock should have its own star on Hollywood. This is the team that brought the world the vaccine for the novel coronavirus. The reward they received from Wall Street was a pop on the news, then a 20% drop. Therein lies the opportunity today. It has fallen into the clutches of a pivot zone that has been in contention since 1998. More often than not, these provide support. In addition, PFE’s management team didn’t give investors reasons to ditch the stock. This is likely the result of wrong expectations.
We are emotional beings and the pandemic exaggerated those effects in our trading. The collective was desperate for a medical solutions. Now that we got it, the exuberant feeling is wearing off. PFE stock fell off the radar as they chase the next big thing. In reality the business is healthier and more stable than most of the rest making new highs. This is a buyable opportunity, especially for investment purposes.
Fundamentally it has a price-to-earnings ratio of 20x, which is reasonable. This is especially true now because of the 4.5% dividend it pays. The central bank’s actions killed most other sources of fixed income. Stocks like these are the next best thing. I consider PFE stock the proxy for owning U.S. bonds a few years ago. This is truer now that it has slid into support. There is no guarantee it won’t fall further but it still makes for a good attempt to catch this falling knife.
It does so in slow motion unlike other momentum stocks these days.
Merck (MRK)
Investor reaction to Merck’s earnings report was less than enthusiastic. I would have expected a bigger negative reaction in MRK stock since the company missed both on sales and earnings. These days even strong reports are susceptible to punishing performance on Wall Street. Therefore, fans of Merck should consider this a blessing. Management is confident in its efforts so there are no immediate alarms. The proof is in the pudding as they tripled their net income since 2017. In addition, the stock pays 3.5% yield in dividends. Clearly there is nothing wrong with the innerworkings of the company, so there is no reason to panic.
The price action on the chart also suggests the same thing. Those who own the stock can wait it out. MRK is falling into proven bounce levels from June and October. Only the stint last March went deeper. This could also make a decent new entry for a swing trade attempt. Price could stabilize near $75 per share and bounce towards $82. I would be much more comfortable with this statement if the indices weren’t breaking records. If the markets correct, then this could drag this opportunity lower too.
Support levels on charts are not fool proof. Investors are not logical and they act with emotions. If the panic sets in, they will sell everything available. Merck has a price-to-earnings ratio of 29x, so it’s not dirt cheap. Given the right circumstances it could still tumble. To avoid that fall, traders should stop out of the swing trade opportunity below $74 per share. It might comfort some investors that the experts on MRK stock don’t see reason to panic either.
Regeneron (REGN)
The reaction to the company’s earnings report couldn’t hold the pop. Regeneron beat estimates, but investors are somewhat disappointed with certain aspects of the report. Basically, Covid-19 hurt sales in its older drugs and failed to wow investors in its own performance. Management suggested that it’s a timing thing, so we can take their word and reevaluate next quarter. Besides, the miss on the antibody mix was small.
REGN stock has already been against the ropes in trend but not in performance. Yes, it has been sliding since last summer, but over a year it is still up 30%. This is somewhat in line with the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB). That’s the cue that I would follow. Nothing is wrong because this is purely price pin-action from the virus outbreak. Eventually things will stabilize and REGN stock will continue its winning ways.
The medical community is still suffering from pandemic disruptions. Schedules for normal procedures ceased last year. Eventually they will get back on the docket, but until then, drug sales and medical equipment sale are hurt. The U.S. is administering virus vaccines as quickly as possible and things should start normalizing soon. This is not to say that this will happen overnight, but it has to start somewhere.
If you are long REGN stock, I would suggest that you stay in it as it approaches its prior support zone. This would also make for a decent new entry for a swing trade if markets hold up.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
