Biotechnology stocks are hot.
New developments in clinical trials and drug approvals have become commonplace. And buyouts of biotech stocks at high premiums are increasing.
Here is how to get your share of the outsized gains that are being generated. Let’s explore the issue with the help of two charts.
Please click here for an annotated chart of the buyout of Tesaro by GlaxoSmithKline GSK, +0.18%. The acquisition was completed in January. For the sake of transparency, this chart was previously published.
Note the following:
• Sometimes big profits are quick, as was the case with the buyout of Tesaro by Glaxo, as shown on the second chart. Arora’s buy signal produced an average buy price for Tesaro of $34.61. In a matter of days, Tesaro received a $75 cash buyout offer.
• The first chart shows the Arora buy signal for a core position in Global Blood Therapeutics with an average price of $29.73 in 2017. It has taken a long time for the stock to reach the $79.35 price as of this writing.
• The first chart shows the FDA’s acceptance of a new drug application (NDA) from this biotech.
• The first chart shows the FDA’s approval of Oxbyta for the treatment of sickle cell disease.
• The first chart shows that the up move has accelerated after the approval.
• The first chart shows that the up move has occurred on good volume. This is a positive.
• The first chart shows that the stock is overbought. This indicates caution in buying this stock at this level even though The Arora Report’s targets for this stock are higher.
• As we have previously written, Global Blood Therapeutics remains a buyout target. We have provided potential price zones at which a buyout may occur.
• While most investors are focused on popular large-cap stocks such as Apple AAPL, -1.56%, Amazon AMZN, +0.38%, Facebook FB, +0.79% and Google GOOG, +0.89% GOOGL, +0.87%, they are missing out on the money that is being made on biotechs.
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An evergreen strategy is to buy stocks in companies that are likely to be bought out at attractive premiums. To date, 151 of Arora Report portfolio companies have been acquired. For more on this strategy, please read “Here’s an evergreen strategy to make money in a volatile stock market.”
Biotechs are especially attractive for buyouts. The Arora Report’s successful calls made in advance include buyouts of Tesaro by GlaxoSmithKline, Medivation by Pfizer PFE, -0.01%, Ariad Pharmaceutical by Takeda TKPHF, +1.88%, Actelion by Johnson & Johnson JNJ, -0.06%, Advanced Accelerator Applications by Novartis NVS, +0.35%, and InterMune by Roche RHHBY, -0.29%.
How to buy
Biotechs are volatile and can cause huge losses. Investors ought to treat these as speculative positions and control for risks. The key is to diversify, understand position sizing and use trade-around positions in addition to core positions.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.