Some Like 'Hot' Stocks. But I'll Take My Biotech Cool
Let's look at a clever, if sleepy, way to make the most of this badly underperforming sector.
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The first trading day of the second half of the year saw some serious sector rotation yesterday, shaking up Nasdaq, the homebuilders and biotech. The latter, at one point, was up better than 2% in trading, but then the SPDR S&P Biotech ETF XBI ended the day barely in the black. So, let's take a look at that sector and how I'm playing it.
This sector has badly underperformed the overall market in recent years, but I prefer its fundamentals compared to housing-related stocks. For one, numerous bargains can be found.
I was recently asked by a frequent commenter to the Daily Diary about my current favorite picks. My criteria for that sort of selection varies greatly from the typical investor. I am not looking for biotech stocks that are going to surge hugely on positive trial results or be rewarded with large buyout premiums after being purchased by a big pharma name. I mostly target companies with solid balance sheets that are delivering solid growth, provide reasonable values and are nicely profitable.
Moreover, I want biotech stocks with good liquidity in the options against their equity with solid premiums. This is because my primary strategy for adding exposure to this beaten down part of the market is via simple covered-call trades. This way, if the sector continues to trade sideways, I will continue to make considerable bank. I also achieve considerable downside protection when the inevitable breakdown occurs with this overbought overall market.
My regular readers know some of my "rinse, wash, and repeat" covered call trades in this sector by now. These include names like Dynavax Technologies DVAX and Aurinia Pharmaceuticals AUPH. My perfect biotech stock is one I get two "turns" a year with and that delivers returns in the mid-teens with each trade. No swinging for home runs, just good consistent singles with the occasional double thrown in.
Neurocrine Biosciences, Inc. NBIX is another name I frequently trade. It seems this mid-cap biopharma has two or three buyable dips every year that consistently work out well for my portfolio. Its flagship product is called Ingrezza, which is approved to treat tardive dyskinesia, type of involuntary repetitive body movement brought on by use of some anti-psychotic medications. Ingrezza is still seeing decent sales growth and should deliver over $2.5 billion in revenues this year.
The company’s launch of Crenessity, which won Food and Drug Administration approval late last year, appears to be going quite well. In addition, the company has two other pipeline assets that are in ongoing, late stage registrational trials. Neurocrine ended the first quarter with some $1.8 billion in cash and no long-term debt. Management recently also increased its stock buyback authorization. The company is nicely profitable and should deliver sales growth in the mid-teens consistently over the next few years.
None of these selections are as exciting as a clinical-stage concern with make-or-break trial results coming out on the near-term horizon. But these names deliver consistent results. And over the decades, I have found "boring" to be a good thing with my biotech trades.
At the time of publication, Jensen was long AUPH, DVAX, NBIX, and XBI.
