3 Biotechs to Watch Over the Next 6 Months

Biotech stocks Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Amgen, Inc. (NASDAQ:AMGN), and Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) tend to outperform in the second half of the year

by Andrea Kramer

Published on Jul 7, 2016 at 2:06 PM
Updated on Jun 24, 2020 at 10:16 AM

The second half of 2016 has started on a positive note, with the major market indexes in the black thus far. While we've already established some of the best and worst stocks for July, as well as historically hot and cold stocks for the third quarter, below we're going to take a longer-term look and outline some potential second-half gems, if history is any guide. Specifically, we'll examine three biotech stocks that tend to outperform after June 30: Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Amgen, Inc. (NASDAQ:AMGN), and Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN).

Below are the best-performing stocks from July 1 to Dec. 31, going back 10 years, courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. The stocks had to have at least eight returns to qualify, and the list is sorted by percent positive, then by average return. Only one stock has been positive in the second half over 10 straight years: blue-chip Procter & Gamble Co (NYSE:PG). The rest of the list is relatively diverse, with quite a few stocks under the healthcare umbrella making the cut.

Best 2H Stocks July 7

REGN spent several years relentlessly blazing a trail higher on the charts, ultimately hitting an all-time high of $605.93 in August 2015. Since then, the equity has shed roughly 40% to sit at $365.85, with recent rebound attempts capped by its 10- and 20-week moving averages.Yet, even in 2015 REGN scored a second-half gain, and has muscled higher in the last six months of the year 90% of the time in the last decade, averaging a healthy return of 26.8%.
 
Despite a year-to-date loss of roughly 33%, option buyers have grown increasingly bullish. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 2.88 is higher than 96% of all other readings from the past year. That's a big shift in sentiment compared to mid-June, when REGN put buying was at an annual high.

However, 12 out of 20 analysts offer up lukewarm "hold" or worse ratings, and short interest represents nearly a week's worth of pent-up buying demand, at Regeneron Pharmaceuticals Inc's (NASDAQ:REGN) average daily trading volume. Against this backdrop, it's possible that some of the recent call buying could be attributable to short sellers looking for an options hedge.

Since peaking at $181.81 in late July, AMGN has wobbled between support in the $140 region and resistance at $165. The shares were last seen in the middle of this range, at $155.45. However, if past is prologue, the second half of 2016 could be much better than the first. AMGN has notched a second-half win 90% of the time during the past 10 years, averaging a gain of 10.3%.

However, unlike REGN option buyers, Amgen, Inc. (NASDAQ:AMGN) bears rule the roost. The stock's 10-day put/call volume ratio on the ISE, CBOE, and PHLX sits at a 12-month high of 2.71, indicating that traders have bought to open nearly three AMGN puts for every call during the past two weeks. The security's Schaeffer's put/call open interest ratio (SOIR) is now at an annual high of its own, at 1.60, pointing to a much bigger-than-usual put bias among near-term traders.

ALXN also hit an all-time high last summer, and like REGN and AMGN, has since staged a retreat. Specifically, since touching a record best of $208.88 on July 23, ALXN has given back 41.3%, and tagged a two-year low of $110.56 on "Brexit Friday"(June 24). Going back 10 years, though, ALXN has notched a second-half win eight times, averaging a notable return of 25.9%.

But if Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) continues its recent slide, the biotech could be at risk of downgrades. Despite underperforming the S&P 500 Index (SPX) by about 23 percentage points during the past three months, 14 out of 18 analysts maintain "buy" or better endorsements.

In fact, as a whole, biotech remains one of the most beloved sectors, per our internal Sector Scorecard, which factors in price action and sentiment. Considering the 55 stocks under our "biotech" umbrella, 65% of analysts offer up "buy" or better ratings -- the biggest bullish bias of any sector outside of alternative energy. This, even as the average 52-week return is 33.7% -- the worst of all sectors that we track.

However, some analysts think there's more room on the bullish bandwagon; Jefferies yesterday waxed optimistic on the short-term future of drugmakers. "Coupled with biotech's best month typically being July and a higher number of M&A deals historically announced in July, this could help sector sentiment improve into summer," the analysts wrote. What's more, Jefferies said it expects a bottom-line earnings beat for REGN, among other large-cap drugmakers.
 
In conclusion, most biotechs have been off their game since last summer, yet Wall Street remains enamored. Further, short interest has actually dropped an average of 3.5% over the past year, for the 55 drugmakers on our list, echoing the lack of skepticism. While this sentiment set-up could leave many biotechs vulnerable to an exodus of bulls, it will be interesting to see if struggling REGN, AMGN, and ALXN can stage another second-half recovery, or if the best days are behind them.

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