High Risk, High Reward—Two Great Companies for Traders

Two Great Companies for TradersListed below are two stocks that you can trade. They are biotechnology stocks, and they have a growing following among institutional investors. As you know, biotechnology stocks are event-driven; on the stock market, they move on news. Plus, the action can be particularly robust, due to the high level of institutional participation in this sector.

Institutional investors love biotechnology stocks and traditional pharmaceutical companies because the successful ones are very good at making lots of money. It costs a lot to develop a new drug, but the rewards are there if it gets approved. I think there’s a small role for biotechnology stocks in more aggressive equity portfolios. They’ve been one of the strongest sectors in the stock market in recent years.

Alexion Pharmaceuticals, Inc. (NASDAQ/ALXN) is one of the biotechnology stocks that can really fly on the stock market with good news. We’ve looked at this company before, and it is highly successful considering it only sells one approved drug at this time. The company reports on February 14, and you can trade off the news if it is good (a strategy known as piggybacking). Alexion’s stock chart is below:

ALXN Alexion Pharmaceuticals,Inc Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

Another company getting increasing attention from institutional investors is Endocyte, Inc. (NASDAQ/ECYT); it’s one of those biotechnology stocks that are still at the development stage. What I like about Endocyte is the way in which it’s developing its proprietary “EC145” product for platinum-resistant ovarian cancer, a form of cancer that’s highly resistant to treatment. The company is now applying for a Phase 3 registration trial for EC145; but it’s applying in collaboration with Merck & Co., Inc. (NYSE/MRK), which paid Endocyte a large sum of money for rights to the drug. These collaborative developments are the way to go for smaller biotechnology stocks, and the deal with Merck is a huge vote of confidence. Endocyte’s stock chart is below:

ECYT Endocyte Inc Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

Endocyte doesn’t report its fourth-quarter numbers until February 25, but its trading action on the stock market will rely more on pharmaceutical events than financial results.

You can’t predict the future with biotechnology stocks, but if you’re a keen trader, you sure can piggyback on big news events. I think these two biotechnology stocks have a lot of potential this year. Alexion is the growth story, while Endocyte is the development story. Of course, every growth story comes to an end; if Alexion doesn’t beat the Street this week, it could get creamed on the stock market.

One thing you can always count on with biotechnology stocks is that they don’t really move with the broader stock market; they dance to their own tune. (See “A Bear Market for Stocks? Not for These Two Companies.”) Investment risk is high, but so is the potential reward, because we all know how expensive—and profitable—pharmaceuticals are.

The last two years have been particularly kind to biotechnology stocks. The NASDAQ Biotechnology Index is now at its all-time record high, and countless names within the index have done fantastic on the stock market. Regardless of what happens in the world or on the stock market, these companies will continue to develop new drugs. It’s a growth industry, and never before has the U.S. Food and Drug Administration (FDA) approved so many new products for the marketplace. The stock market is taking notice.