Rules of the Game: Biotechs in Rally Mode

 | Apr 26, 2013 | 6:00 PM EDT
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In my most recent column, I highlighted two info tech stocks that have rebounded to multiyear highs. Asset manager Gennady Kupershteyn of Kupershteyn Advisory Group pointed me toward these stocks. He noted that investors should avoid chasing too much price growth and instead pay attention to valuations at these levels.

For investors who are accustomed to scouting for value, the idea of buying a momentum stock at new highs is laughable, to put it nicely. But for momentum and growth investors, and those who simply don't want to be left out of an uptrend, it's not out of the question to buy a stock as it's soaring to new heights.

The problem is, a correction -- or at least a pullback -- always follows an uptrend. If a stock zooms higher after earnings, or as it just follows along with the general market direction, profit-taking is usually fairly close behind. This is what Kupershteyn is hoping to warn momentum traders and investors about.

Of the stocks he identified, there was a preponderance of names from the medical and info tech sectors.

United Therapeutics (UTHR) is a mid-cap biotech stock that's trading near its best levels since June 2011. On Thursday, it had one of those split-personality days. The company reported earnings that missed estimates, sending the stock into an opening-bell gap-down. However, revenue beat expectations, so the stock gradually trended higher throughout the session, as investors and traders digested the news.

United Therapeutics finished at $61.67, down 2.5% on the session but still holding 2.4% above its 50-day average.

The stock recently moved out of a fairly shallow correction, and for technical traders, it could be in a potential buy zone. For those who have a longer-term viewpoint, consider the fundamental case. The price-to-earnings ratio is 11, much lower than the biotech industry average of 64. That's a good sign, particularly in an industry that is home to many speculative stocks that don't have any revenue or earnings to speak of.

I realize that biotechs often hold appeal as potential acquisition targets, and there is also the gamble that a therapy will have good clinical results and get FDA approval. United Therapeutics is light years beyond that kind of stock; the company makes treatments for cardiovascular ailments, cancers and infectious diseases. It has been profitable in eight of the past 10 years, and annual earnings growth has accelerated for the past three years.

Some large-cap biotechs also showed up on Kupershteyn's screen. Most of these are names I've been tracking for quite some time on my growth screens as well.

One of those, Biogen Idec (BIIB), reported earnings before the market open on Thursday. The company develops treatments for autoimmune inflammatory conditions, multiple sclerosis and cancer. The stock leapt 4.8% Thursday, after a first-quarter earnings beat and an increase in its full-year earnings outlook.

It finished Thursday at $216, an all-time closing high. This is an excellent example of a stock that's trading at some lofty levels at the moment but holds potential for investors who are willing to be patient.

The P/E ratio is 35.8, so it could be considered expensive. This is why it's best to keep this stock on a watch list and wait for the inevitable pullback. Whether it's pegged to market action or simply profit-taking in the stock, it doesn't matter. Biogen is widely held, being an S&P 500 component that moves more than 1.3 million shares per day on average. In other words, there is good liquidity here, and it would not be surprising to see index action as the catalyst for the next significant pullback in the stock. That could well be the next buying opportunity.

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