Technicals Matter in a MOmentum Market

Some important trends are developing in momentum stocks some of which are on in our Life Science Portfolio. As we have written previously many momentum stocks are being driven by media buzz, novel business models and sponsorship from hedge funds and growth mutual funds. If you are a momentum trader or investor you know that momentum begets momentum like a law of physics (p=mv) that lies outside of the financial analytics universe. With enough fuel from the FED, a hedge fund can borrow at 2-3% and launch their favs to momentum cult status. In this bull market sentiment rules.

Within our life science universe we have maintained a bullish stance since 2009 and several of our picks landed up in the MO camp:

Alexion (ALXN $91.72), Regeneron (REGN $172) and Pharmacyclics (PCYC $91.6) are all up huge since initiation. These are larger cap stocks with deep product portfolios and innovative technologies. These stocks have only been “discovered” over the past 3 years coincident with this round of the biotech bull market. Whereas ALXN and REGN have corrected and stabilized PCYC is still near a top, up more than 100% since we picked it as a paired trade long, with Medivation (MDVN $46.65) short. MDVN is a broken MO stock (double top at $58) down 9% YTD but still up 25% over 12 months.

Traders looking for a correction in a “bubblicious” biotech market might explore a paired trade with long veteran biotechs, short MO stocks. Infinity Pharmaceuticals (INFI $48.66) is a classic MO stock up 453% over one year and 39% YTD! There is no compelling news to account for such a move in INFI except accumulation by major hedge funds such as Fidelity and Orbimed Advisors which now own 10M shares as well as upgrades by analysts with price targets near $50. Yes Phase 2 data may be compelling but unless these investors know of a buyout by a major pharma, product revenue is still years away. Despite a lack of Phase 2 data, Infinity is perceived to be a leader in treatment of hematologic malignancies with IPI-145 an oral inhibitor of P13K delta and gamma and a Phase  2 clinical compound for NSCLC, a docetaxel combo agent. INFI has a hefty market cap of $2.3B which we know may not be a reliable measure of value in biotechnology investing. INFI has ample cash of  $325M and a book value of $310M. So the stock could be a good hedge short in a downturn or as paired long trade with a veteran biotech that has revenue growth but lost the MO, such as Alkermes (ALKS $23.17), a CNS player with a market cap of $3B , book value of $919 and revenues forecasted of $540M.

The well known paradox of biotechnology valuations is that no revenue can be better for the stock because once product revenue begins stock valuation is easier to quantify.

Here are some quick metrics of mid-cap biopharma stocks:

Company /Ticker                              Market Cap $B                     2012  Revenue 

Infinity (INFI $50)                                2.37                                         $69.4

Incyte (INCY $24.70)                            3.31                                         $297M

Jazz (JAZZ $59.47)                               3.45                                         $586M

Medivation (MDVN $45.86)                3.44                                         $188M

Pharmacyclics (PCYC $91.1)                6.42                                        $160.6M

Seattle Genetics (SGEN $33.66)          4.06                                         $211M


Outside of biotech other headline MO stocks were down on news and downgrades:

Amazon (AMZN $265) down 3.4% (short only 1.9% of float) on decent volume and Netflix (NFLX $188.37) down 2% (short 14.76% of float). Intuitive Surgical (ISRG $490) has been in a 2013 downtrend flat YTD of a Feb 1 high of $584. The stock broke today at 14:40 p off 3.8% for the day, as robotic hysterectomy surgery for use by  OB/GYNs  is being questioned.

The classic MO stock of 2012 is AAPL which soared to $700 as every analyst and fund manager piled on. Despite a huge cash position and a low PE  the stock broke down to the low $400s as the sentiment turned and MO players bailed.

Many experienced traders have been burned shorting “overvalued” stocks so the strategy is highly speculative. Nonetheless charting can be valuable to determine  a break in momentum or a market correction and MDVN as well as ISRG are good cases. Netflix is a good  example of a “counterparty trade “where competing investors battle each other for dominance. When a correction in the market finally hits, it is likely MO stocks will go down much more than the S&P.

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