What’s Moving These Biotech Stocks?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Typically, it doesn't take a lot for a stock to trade with gains/losses of more than 5% in a session; it can be caused by an analyst's remarks, sometimes it's caused by earnings, or maybe it’s just a technical response. Sometimes the moves are warranted and other times they are not. Therefore, I am looking at several moves to determine if the stocks are presenting value or a value trap.
Stock Rallies on Acquisition Rumors
Regeneron Pharmaceuticals (NASDAQ: REGN) began the session with gains of 7% but then traded lower to maintain gains of 3% on Monday. The gains were caused by news that Sanofi is aiming to buy another $500 million worth of shares in the open market. The two companies are already partners, and Sanofi is limited to the size of its investment. Sanofi has already said that it does not wish to purchase a controlling stake but judging the by the performance of the stock, investors seem to believe that Sanofi might be preparing for an acquisition offer. Regeneron does look expensive to the naked eye, but is consistent with that of other companies that have approved Orphan drugs and others in its pipeline. The company’s growing fast and is much more stable than others with the same valuation. Therefore, I think the stock might be worth buying on this news.
A Volatile Stock Rallies for No Reason
After a volatile year, shares of Peregrine Pharmaceuticals (NASDAQ: PPHM) traded higher by 5% on Monday. The stock rallied on no news but continues to trade in a steady range. At this point, I don’t trust the company. First, there were problems with the clinical study then the study was less affected than thought. There seems to be a lot of inconsistencies, therefore if data is positive for Bavituximab then I would rather pay a higher premium later then buy for a discount now.
Investors Take Profits & Stock Creates Value
European drug maker Novo Nordisk (NYSE: NVO) fell 14% on Monday after federal regulators asked for more testing for its diabetes drug. Now, I understand that a diabetes drug has sales potential in the billions, probably over $2 billion. However, this is a massive company that has several drugs that focus on the treatment of diabetes. The company has more than $13.5 billion in revenue and is growing by 15% year-over-year. Therefore, I think the pullback is a great opportunity. The stock had been trading at all-time highs, and it appears that the loss is more of a technical pullback from the stock having two decades of nothing but gains. I would buy on this news.
Buy on Fundamentals & Not Speculation
While Novo sunk lower, large cap stock Sanofi (NYSE: SNY) rallied 3.5% on news that it was increasing its stake in Regeneron. For the last year many have speculated that it could try and acquire the biotechnology company, and I believe it’s highly likely. However, you should never buy a stock due to the anticipation of an acquisition; it has to be for fundamental reasons. Therefore, buy the stock for its 3.60% yield, its large cash position, and its strong pipeline. If the acquisition occurs then it’s an added bonus.
A stock’s performance during a typical day does not necessarily mean that a stock will break out or trade lower over a period of time. Too often we associate stock performance with fundamental performance, yet it’s the inconsistencies between these two factors that create value. The ability to identify these inconsistencies is a psychological behavior-changing skill that very few investors are able to perfect. In the past, I have talked about this subject in great detail, and have taught investors how to change these tendencies to return large gains. My advice is to become a smart investor, by learning how to logically assess what caused a stock to move compared to its valuation. Then, if there is a distinction in value you are able to capitalize on the value.
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