The biotechnology sector sold off with the broad market in March, but many small- and mid-cap biotech stocks have held close to new highs, exhibiting resilience that could translate into substantial upside in the coming weeks. Even so, careful stock picking will be needed to profit from these rallies, avoiding popular names that have been sold aggressively due to their inclusion in index funds targeted by predatory algorithms during the current correction.
Small-cap biotech leadership has broadened in 2018, with this speculative sub-group offering a variety of bullish setups. However, higher-capitalized leaders may generate fewer sleepless nights for shareholders because they often have approved therapies in production, while small caps are forced to burn tons of cash, guiding good ideas and chemistry through research trials and FDA roadblocks. (See also: 3 Hot Junior Biotech Plays.)
Nektar Therapeutics (NKTR) commercializes a variety of cancer and autoimmune treatments. The stock spent the 1990s rocketing higher in a powerful trend advance that topped out at $70.75 in 2000. The subsequent decline posted deep single-digit lows in 2002 and 2009, finally yielding a new uptrend following a breakout above the mid-$20s in November 2017. Momentum buyers then took control of the ticker tape, fueling a 400% surge that mounted the 2000 high in January 2018. The rally stalled just above $100 in March 2018, easing into a narrow pennant that has shaken off cross-currents knocking down sector rivals.
This relative strength bodes well for additional gains in the coming weeks, with a breakout above $110 setting off broad-based buying signals. Conversely, a decline into the 50-day exponential moving average (EMA) at $90 could offer a safer entry for risk-adverse market players, as long as a tight stop loss is placed under that level. The company's presentation at the American Association for Cancer Research (AACR) Annual Meeting on April 14 could provide the breakout catalyst. (For more, see: Biotech Stock Nektar May Be Ripe for a Sharp Pullback.)
Netherlands-domiciled argenix SE (ARGX) develops drugs for the treatment of autoimmune diseases and cancer. The stock listed on the Nasdaq exchange in May 2017, opening at $17.90 and lifting to $25 in the first publicly traded session. Price action then settled into a narrow range, ahead of a September breakout attempt that faded badly. A November buying surge finally cleared the barrier, setting off a vertical rally that topped out in the mid-$80s in January 2018.
The stock then dropped into an ascending triangle that is still in force more than two months later. A pullback into late March found support just above the 50-day EMA, suggesting the start of a fourth test at triangle resistance. The breakout should target $100, with additional consolidation likely around that psychological level. Interested market players should follow the company's presentation at the 2018 Kempen Life Sciences Conference on April 18, looking for a catalyst that could set the rally into motion.
Vericel Corporation (VCEL) sells three commercial products used in the treatment of cartilage and skin defects. The stock entered a multi-year downtrend after topping out at a reverse split-adjusted $1,450 in 2000, finally bottoming out at $1.69 more than 15 years later. A rally spike up to $3.70 got sold in April 2016, ahead of a January 2018 breakout that attracted strong buying pressure, lifting toward the August 2013 high in the mid-teens.
The rally posted a four-year high at $12.80 in March and turned tail, with the pullback finding support just above the 50-day EMA. The uptrend could now resume, or the stock could fill the March 5 breakaway gap between $8.00 and $9.20. A trade in that price zone could offer a low-risk entry, ahead of continued upside that could reach heavy resistance generated by the 2013 breakdown through support in the mid-$20s. (See also: The Biotech Sector: A Primer.)
The Bottom Line
Small- and mid-cap biotech stocks have attracted significant first quarter capital despite broad headwinds, with a number of plays set to post healthy second quarter upside. (For additional reading, check out: 7 Stocks for the Biotech Takeover Wave.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>