(This commentary originally appeared on Real Money Pro on Friday. Click here to learn about this dynamic market information service for active traders.)
It has been a nice little run for the previously beaten down biotech/biopharma sectors so far in 2017. February saw the main biotech indices rise some 10%, in one of their best monthly performances over the past few years. An uptick in M&A activity, as well as the prospect of tax and regulatory reform, have buoyed sentiment on this part of the market early in the year.
Biotech is at the very top end of a trading range it has been locked in for more than a year now. I think we need another M&A deal, or two, to finally break through this resistance level decisively. Doing so looked promising in early trading yesterday, but an afternoon selloff put the main biotech indices right under this resistance ceiling, once again, by the end of the day.
It has been an amazing run for some of the small biotech companies that I have profiled on these pages over the past year. Aeri Pharmaceuticals (AERI) is up some 150% since I recommended it late in August and Cara Therapeutics (CARA) is up almost that much, as well, since being positively profiled in April. Names like Progenics Pharmaceuticals (PGNX) and Portola Pharmaceuticals (PTLA) , which I have covered many times, have doubled since the November election.
So what is an investor to do after massive runs like this? I still like the long-term potential and still own the majority of my original stake in all of these names. But that does not mean an investor should not take some gains along the way during these massive rallies, as biotech is a notoriously fickle part of the market that can rip or dip on even a slight change in investor sentiment. So even thoough all of these stocks have potentially positive catalysts on the horizon, I still think it is more than prudent to cull some profits in these rockets.
As always, I employ the "Jensen Rules" when doing so, as it provides a strategic and non-emotional blueprint to do this on a logical and timely basis. I have stated these rules often on these pages, but here they are once again for new readers.
If you buy 1,000 shares of a small-cap stock:
- If the equity goes up 50%, sell 100 shares.
- If the stock doubles, sell another 200 shares.
- If the shares triple, sell another 200 shares.
You now have locked in a guaranteed profit even if the stock goes to zero. You also have 50% of the original stake riding on the "house's money," one of the best free rides there is.
This does not mean I am souring on the biotech sector overall, although if we don't break through resistance levels over the next week, I would not be surprised to see some profit taking in the sector -- and in the overall market, for that matter. However, being prudent and strategic around managing a biotech portfolio is just good risk management.
I also see more upside for the sector by the end of 2017. In Monday's column, we will discuss some small-cap names that are attractive and have upcoming catalysts; but have not had the runs the stocks profiled above have enjoyed to date.