(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Agios Pharmaceuticals Inc. (AGIO), Sarepta Therapeutics, Inc. (SRPT) and Spark Therapeutics Inc. (ONCE) have had a hot start to 2018. All three companies have easily outperformed not only the S&P 500 but their peers as well, using the SPDR S&P Biotech ETF (XBI) as a proxy. However, a review of the charts and trading patterns suggest each stock could have a harder time going forward, with each falling by 10% or more in the coming weeks. (For more, see also: Top 5 Biotech Stocks for 2018.)
Agios jumped by over 43% in the first quarter, while Sarperta climbed by over 33%, with Spark rising by over 29%. Those big returns come versus an S&P 500 that fell by over 1%, while the S&P Biotech ETF increased by over 3%, amid surging levels of volatility.
Agios shares have rallied, as investors eye the significant opportunities the company's robust pipeline to treat cancer patients offer. However, the stock chart has started rolling over in recent weeks. The relative strength index (RSI) has also been trending lower since peaking at overbought levels, with a reading over 70, and in mid-January reaching 75. Additionally, volume has been declining as well, and it all points to a stock that appears to be tiring, with buyers beginning to thin out. The stock sits on its uptrend presently, and a break of that uptrend sends the stock to $72, a decline of about 12% from its current level at $81.78, as of March 29.
Sarepta shares jumped in mid-March after a competitor's trial in Duchenne muscular dystrophy was placed on hold by the FDA. However, the big gains from the news are likely to fade and result in shares falling by over 14% to $63.85 from its current price of $74.09. The RSI reached overbought levels with a reading near 80 on March 14, and has fallen sharply along with the stock. Still, the stock has yet to reach oversold levels, which happens when the RSI drops below 30. Additionally, when the stock jumped in mid-March, it created a gap in the chart and now that gap needs to be refilled at $63.85. (For related reading, see also: The Rush to Biotech ETFs Is Back On.)
Shares of Spark fell sharply in mid-December after the company reported disappointing hemophilia A data, resulting in the stock dropping by 35%. That significant drop also created a massive gap in the chart, and with the stock now trading at $66.59, that gap has closed. The chart shows how the stock has tried on multiple occasions in March to climb above resistance at $67.50, and has failed. With the gap now closed, the stock is likely to resume its prior downtrend, and retest support at $60.50, a drop of about 11%.
These stocks were three of the hottest biotechs to start 2018, but it is looking like they are due for a pullback to start the second quarter.
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.