(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of CELG.)
The worst may not be over for biotechnology stocks. It wasn't long ago that the sector was hot, and the group saw a significant breakout. In an Investopedia article on January 12, we noted that the sector was on the verge of a big breakout, and a few days later, the breakout occurred. But then suddenly, the broader market took a big hit, and the group was not immune.
Then, a slew of disappointing earnings and bad news from Gilead Sciences Inc. (GILD), Celgene Corp. (CELG), and Biogen Inc. (BIIB) hit the sector further. A technical analysis of each of the three stocks suggests the group is approaching a make or break moment. (See also: Biotech Stocks Near Massive Breakout.)
The iShares Nasdaq Biotechnology ETF (IBB) was up nearly 11 percent on January 29. By February 8, that turned to a loss of almost 2 percent on the year. The post-selloff rebound in the group has been muted, which means investors are likely looking to other sectors to find opportunities.
Celgene's fall from grace has been harsh, and the market has been unforgiving in the company's missteps. The stock is down nearly 40 percent from its highs over the past 52 weeks.
More bad news hit on February 27, when the company announced the FDA would not accept the filing for its experimental multiple sclerosis drug, ozanimod. With the biotech's most recent declines, the stock is approaching a very important level of support around $83, which is about 6 percent lower from its current price of around $88. If the stock is unable to hold that level of support, it could decline much further, perhaps by 23 percent, to roughly $67.
Biogen is in a similar situation as Celgene, as shares that one seemed likely to rise to all-time highs have turned violently negative. Since January 26, the stock has declined by over 21 percent, and are fast approaching an inflection point at $281. This is a critical technical support level. And should that support hold, then the stock could see a meaningful rebound, while a break of that support could send shares another 13 percent lower toward $250.
Gilead shares have also stalled recently and could fall by roughly 8 percent back to a rising trend line around $73, from its current price around $80. But again, $73 is a critical technical region for the stock to hold because a drop below could signal more declines, on toward $64 – a drop of nearly 20 percent from current levels.
This is a make-or-break moment for these three stocks, and for the sector as a group. But should all the technical support levels hold, then a meaningful rebound could be on the way.
It is hard to imagine the sector could see a meaningful rally without these three stocks.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.