What Traders Love So Much About This Sector

Traders Love So Much About This SectorWhen we looked at Biogen Idec Inc. (BIIB) in late April, the biotechnology company was trading around $218.00 a share. Now, it’s trading between $230.00 and $240.00 or so and is still a big momentum bet.

The company recently raised its forecast as its multiple sclerosis (MS) drug, known as “TECFIDERA,” is now the leading MS therapy drug in the U.S. The drug is approved for use in the U.S., Canada, and Australia, and the company is working on approval from the European Medicines Agency (EMA).

The right drug company can defy prevailing stock market sentiment and make a lot of money for shareholders. While biotechnology stocks typically trade on their own material developments, they are often super high-risk and very volatile investments. They are perfect for risk-capital traders and momentum players.

Biogen Idec’s total revenues in its third quarter of 2013 grew 32% to $1.8 billion, with earnings growing 22% to $488 million. The company’s growth rate is slowing, but this could change significantly if more markets for its MS treatment open.

Another biotechnology stock that’s experienced major momentum in its operations and on the stock market is Alexion Pharmaceuticals, Inc. (ALXN). The stock has tripled over the last three years, and earnings estimates continue to rise for this year.

The company’s main drug offering is “Soliris,” which is a treatment for a debilitating blood disorder known as paroxysmal nocturnal hemoglobinuria.

Third-quarter net product sales grew 36% to $400 million. Non-GAAP earnings grew 39% to $168 million.

The company recently increased its 2013 revenue guidance, and the stock reaccelerated from a recent consolidation. (See “Why Momentum Traders Love These Stocks.”)

Speculating in biotechnology stocks is risky business, and the marketplace can cut positions in half in the blink of an eye. But it is a stock market sector ripe for momentum trading. Put together a list of biotechnology stocks hitting new highs, and you’ll find some attractive growth stories.

Of course, trading this sector is not for the faint of heart. It’s all about managing the trade and prevailing sentiment. Potential return is a lesser part of the equation if you’re a trader.

You can’t know if a drug will get approval or what the results of a clinical trial will be, but you can trade a stock’s momentum based on sentiment, the underlying story, and price corrections. A biotechnology company with one or two approved drugs that are in high demand is a powerful combination as the two above-mentioned stories illustrate.

Valuation is always relative in big growth stories. Institutional investors can be very generous in affording growing biotechnology companies high multiples that wouldn’t be effected in other sectors.

No position is ever worth chasing. Buying or selling a stock is a business decision and trading is obviously different than investing. But biotechnology growth stories with high participation from institutional investors can make for really good trades.

When positions correct among fast-growing, large-cap biotechnology stories, they are worth a second look for risk-capital traders.