Biotech Gets a Bid and I'm Playing
Thoughts on a sector that is pulling its own weight even as cracks are starting to regularly appear in the credit markets.
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In my column on Wednesday, I highlighted why prudent investors should take Jamie Dimon’s commentary following better-than-expected Q3 results from JPMorgan Chase & Co. (JPM) to heart. Dimon pointed to some of the deteriorating conditions in the credit markets emphasized by the recent bankruptcies of sub-prime auto lender Tricolor Holdings and auto-parts supplier First Brands. Both debacles seemed to have contained their share of shenanigans.
Well, my timing seems to be quite prescient as markets were rocked on Thursday after new loan problems were disclosed by Zions Bancorporation (ZION) and Western Alliance Bancorporation (WAL). This sent the markets lower Thursday with regional banks hit particularly hard. The SPDR S&P Bank ETF (KBE) fell over 5% on the day. I have been talking about cracks in the credit markets for months now and it is a topic I will likely return to next week as there is "never only one cockroach."
However, as usual, I want to end the trading week on a high note. Therefore, we are returning to the biotech space.
In the last month, there have been four mid-cap biotech buyouts executed with significant takeover premiums. This has triggered a nice rally across the industry, and the sector has easily outperformed the market over the past several weeks.
The SPDR S&P Biotech ETF (XBI) was up more than 3% on Wednesday alone. The sector also was solid during the selloff on Thursday, hanks partly to Praxis Precision Medicines (PRAX), which was rose 180% on positive late-stage trial results.
I have profiled several biotech/biopharma names as covered call trade ideas over the past month or so. These include small-caps like Vanda Pharmaceuticals (VNDA), mid-caps such as Krystal Biotech (KRYS) and large-caps like Gilead Sciences (GILD) . All of these equities I will have no hesitation adding to if we get any actionable dip in the overall market.
It does feel like the market could go "risk off" in the coming weeks, especially if more landmines are exposed within the credit system. Therefore, I plan to stick to names like those above that have approved products on the market and solid balance sheets. Biotech/biopharma names such as Acadia Pharmaceuticals (ACAD) and Exelixis EXEL fit the bill.
I will most likely avoid the clinical-stage space right now. If volatility spikes, this niche of the sector historically gets hit quite hard through no fault of its own.
At the time of publication, Jensen was long ACAD, EXEL, GILD, KRYS, PRAX, VNDA and XBI.
