February 17th, 2014
by Mitchell Clark, Profit Confidential
The last time we looked at Alexion Pharmaceuticals, Inc. (ALXN), the position was trading around $121.00 a share. Now, it's $175.00 a share, and once again, the company reported outstanding financial results from its "Soliris" wonder-drug.
This stock has been a powerhouse wealth creator, and virtually every time we take a look at it, the share price is higher.
There has been and continues to be tremendous momentum with biotechnology stocks in this market. And a great deal of it is happening in the large-cap space, where price momentum, thanks to institutional investors, has been robust and often very consistent.
Previously in these pages when looking at Alexion Pharmaceuticals, we also considered Biogen Idec Inc. (BIIB). (See "How Risk-Averse Investors Can Capitalize on 2014's Expected Record Drug Approvals.") It's a similar story in terms of the price momentum being experienced on the stock market. In our last update, the position was treading around $290.00 a share; now, it's $325.00, representing another new record-high.
Strong trading action in biotechnology stocks is partially due to economic success within this specific sector, but it's also a reflection of buoyant capital markets, or equities in particular. The speculative fervor that investors have for this sector has been unmatched in recent history.
The NASDAQ Biotechnology Index broke out of a 12-year price consolidation in 2011 and has almost tripled since. While there were some retrenchments in this index in the last few years, considering the inherent volatility in biotechnology stocks, the pullbacks have been minimal.
While monetary policy is favorable to equities, like it is currently, I'd say there's further price momentum in a lot of these stocks, specifically those that are already existing winners.
Momentum investing is risky business, and it requires the rest of the marketplace to be buoyant. But investors have proven to go where the growth is, and it certainly is with this specific sector.
In good markets, buying high to sell higher is very much a useful investment strategy. The key is to know when to get out of that kind of trading.
With many of these stocks, even with well-established names, historic trading action reveals long periods of nonperformance, followed by very fast periods of tremendous capital gains. Amgen Inc. (AMGN) is the perfect example of this. The company's stock chart is featured below:
Chart courtesy of www.StockCharts.com
In any case, the action can be robust, both up and down. Therefore, historical price momentum is a useful indicator. With strong risk management and specific trading rules, biotechnology stocks are definitely worthy of consideration. The sector is, of course, 100% risk-capital only.
Leaders within the NASDAQ Biotechnology Index are likely to keep doing well, so long as there is certainty regarding the Federal Reserve's monetary policy and there are no unexpected shocks to the system.
Operational momentum with companies like Alexion pharmaceuticals and Biogen Idec seems to be intact near-term; given current information, I see no reason why stocks like these two biotechnology stocks won't keep ticking higher this year.