Friday, January 29, 2010
Back in October, I highlighted five biotech stocks – each with upcoming FDA decisions – that could serve as ultra-profitable short-term trades.
A couple of these trades provided interesting setups. One of them was absolutely textbook. If you got in, you scalped a 45% profit in about five days.
I've got several more ideas that might do the same or better next month. Before I get to them, let me show you how these trades work. The idea is simple...
Biotech stocks face life or death at the hands of the FDA. Drug approvals can send stocks soaring 20%-30% in one day. A rejection, on the other hand, could slash 50%-90% off a market cap in an instant.
Trading biotech stocks ahead of FDA decisions is a sucker's game. It's almost impossible to consistently predict which way the agency will rule. But scooping up shares of biotechs after an FDA rejection is a low-risk way to generate monster returns.
Our 10-year backstudy showed this strategy generates 50% annual returns. And if you're lucky, like we were last time, you can see that in the space of a week.
Here's what happened last October...
Acorda, a New York biotech, had its multiple sclerosis drug under review by an FDA advisory panel. The meeting was scheduled for October 14. In the weeks leading up to the event, Acorda's stock traded hands around $23 per share.
But just five days before the meeting, the FDA aired some doubts about Acorda's drug. (Specifically, the agency expressed concern about its mediocre efficacy and its potential to cause seizures.) Shares crashed, dropping to around $16.
At those prices, investors had already priced in total calamity. Acorda had $8 per share in cash and another marketed drug worth an additional $3-$4 per share. So the downside risk was $4, in the worst case. The upside potential, on the other hand, was $10-$15. Now that's a fantastic risk-reward setup. (Plus, the need for new multiple sclerosis therapies is great, so FDA advisory panels tend to be easy on new MS drugs.)
Sure enough, the advisory panel voted in Acorda's favor. And Acorda shares rocketed up to $25 per share – a quick 45% gain.
"Great," you might be thinking. "That was last year. What can I do about it now?"
Well, I line up these types of situations on a monthly basis. With the right setup, any one of these can land you a fast, safe gain. Here's a look at what's on my trading calendar:
Each one of these FDA decisions will surely be huge stock-moving events. If Xenoport, Cadence, Auxilium, and Amylin receive FDA approvals, these stocks will achieve profitability over the next few years. That's a major milestone for developing biotech companies. But it won't make a great trade.
On the other hand, an FDA rejection for any of these companies will likely drop share prices 30%-50%. And in most cases, that'll be temporary. If I see that kind of haircut, I'll go bargain shopping. So should you...
Procter & Gamble surges... world's largest consumer-products company jumps 2.6% to new high.
Copper crashes... down 7% so far this week.
Greenback rallies 3% in two weeks to five-month high against a basket of six currencies... the dollar trade is on.