Many established biotechs may outperform from here
Figure 1 shows dozens of stocks with double-digit price gain prospects in coming weeks and months. The better ones have experienced worst-case price drawdowns less than several of the DJ-30 stocks.
(used with permission)
Upside price rewards are from the behavioral (of what to do right, not wrong) analysis of Market-Makers [MMs] protecting themselves from possible damaging future price moves. Their forecasts are measured by the green horizontal scale. The risk dimension is of actual price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. They are measured on the vertical red scale. Both scales are of percent change from zero to 25%. Any stock whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line.
The more competitive current securities are Cambrex Corporation (CBM) at , Acadia Pharmaceuticals (ACAD) at , and Exelixis, Inc. (EXEL) at . They each dominate all other choices of returns to the left of them with higher (on the risk scale) upwards locations. Those dominated include the many better-known Celgene (CEL G) at , Amgen (AMGN) at , Incyte (INCY) at , China Biologic (CBPO) and Gilead Sciences (GILD) at .
Risk and reward are primary, but additional details matter
The competitive buy candidates each have other defining dimensions like odds of recovery from price drawdown risks, typical holding periods to reach upside price targets, and other considerations which may justify selection preference distinctions in the mind of any investor. But Risk and Reward tradeoffs ought to be a good starting point for further due diligence analysis. Here is how ACAD and CBM compare.
(used with permission)
The vertical lines in Figure 2 are the forward-looking price prospects for this subject as of the date of the market price of the heavy dot in each vertical. The dots separate each forecast price range into upside and downside change potentials as seen likely at the time.
Those proportions are measured by the Range Index [RI], whose current value of 13 tells that only about 1/8th of ACADs price possibilities in the next few weeks to months lie to the downside, and a 7/8ths are to the upside.
The lower thumbnail picture of Figure 2 shows where the present RI lays in an array of daily RI experiences over the past 4 years. Each stock evolves its own sense of a norm, and here the most frequent outlook proportions are at higher RIs where the prospect for upside change is smaller.
Recent market prices for ACAD below 30 bottomed at $25+ where the RI reached 4. Actual worst-case price drawdowns associated with prior RIs l ike todays 13 have averaged -6%, as noted in Figure 2s row of data between the two blue-background pictures.
The contrasting upside price change prospect of +21.2% would take the stock well above its recent highs, to $34. Prior RIs of 13 have resulted in recoveries from those -6% worst drawdowns to achieve at least some gain in 85 out of every 100 instances. In the past 5 years there have been 13 prior instances of a RI of 13, a small (red flagged) but adequate sample to work from.
Including the portion of unprofitable prior experiences, the overall net gain from prior forecasts like todays has averaged +18.0% when subjected to our standard TERMD portfolio management discipline. That process calls for closing out holdings as soon as they reach the upside limit of the forecast producing their capital commitment, or by 3 months after the date of the forecast if the upside target has not been reached by that time.
The average holding period for prior ACAD RIs of 13 has been only 26 market days (5 weeks and a day) creating a huge CAGR of 394% on the +18% simple return average.
(used with permission)
CBM has a more attractive Reward-to-Risk ratio than all the others, but it is based on a pitifully small sample size of only 5 prior experiences. Its current forecast price range is $61 to $71, completely above its present price of $60. The resulting negative Range Index of -10 is at its low extreme, as indicated by the small blue picture of RI distributions in its 4-year history.
The stock has always recovered from interim price drawdowns after the few prior negative RIs, but its price variability is discomforting. Its +17% gain average of closeouts is reassuring in light of the +18% upside forecast. But the longer average holding periods of 11 weeks substantially reduce its CAGR in comparison with ACAD. Still, a better than 100% rate is quite attractive.
Both of these stocks are very appealing to wealth-builder investors. Few alternatives among the 3,000 stock/ETF population can compete effective ly with them on that basis. The possibility for a disappointment in CBM is perhaps higher than in the case of ACAD.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.
We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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