Consider Playing Catch-Up Via Biotech

 | Apr 10, 2013 | 3:32 PM EDT
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OK, here's what you have to do if you can't take it anymore and need to catch up to the bull or at least mimic the performance of the runaways: Buy deep-in-the-money calls out five months on Celgene (CELG), Regeneron (REGN), Biogen (BIIB), Gilead (GILD) and Onyx Pharmaceutical (ONXX).

I pick these stocks because these are all being re-evaluated upward by the market pretty much every week. They are trying to get where they have to go -- I used to say "galloping" to where they are headed.

We had some big re-valuations in the late 1980s when it became clear that we were in this huge bull market for biotech. These stocks just kept going higher and higher and higher, and people fought them all the way. I couldn't understand it at first. Until I had it drummed into my head that people were buying them for out-year numbers, betting that the drug approvals would come fast and furious and you could profit from them simply by buying the best ones and holding on to them.

I liked to do it with deep-in-the-money calls so I didn't tie up a lot of capital, and when I got big spikes I would sell some common against them -- I called that "ammo" -- so when we had a decline I could buy back the common and keep the calls on.

We are truly in that kind of market again where the valuations seem rich on near-term numbers but might turn out to be cheap in later years simply because this FDA seems to want to approve a lot of drugs earlier than usual, and these have the most in the pipeline.

I think everyone who is trying to keep up with the averages needs some exposure to this industry. I know for many hedge funds this is entirely antithetical to what they want to do. But if you have underperformed, you can keep these positions on as a hedge to multiple expansion.

Because that's exactly what they represent. In spades!

Random musings: The collapse in the foodstuffs is leading to better action in Panera Bread (PNRA) and Chipotle Mexican Grill (CMG), and those could be terrific deep-in-the-money call situations, too...

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volatility is quite low here, and we could see some downsides here in the short term. ...



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