(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Biotech stocks have broken out and in some cases could be set to rise sharply over the next few months. The iShares Biotech ETF (XBI) has risen above a recent downtrend and appears set to climb back to near all-time highs. Some of the most significant gainers could be some of the smaller biotechs such as Amicus Therapeutics, Inc. (FOLD), MiMedx Group, Inc. (MDXG) and Clovis Oncology, Inc. (CLVS), which could be poised to rise by 10% or more.
The hourly chart of the iShares Biotech ETF shows the breakout occurring around December 20, with the ETF rising above a downtrend which has been in place since mid-October. Should the ETF be able to remain over $86, it could be a good indication it is on the way towards all-time highs around $91, an increase of about 7%. (For more, see also: Why Biotech Stocks Are Nearing a Rebound.)
It will likely be the smaller companies that see the most significant gains. Amicus Therapeutics, like the ETF, has also broken out of a downtrend that started in mid-October, when its price recently rose to $13.30. Shares of the stock have rocketed higher, to nearly $14.70, but could be on their way toward $16.50, a rise of about 12%. The chart below shows that the breakout occurred not just on the stock price, but on the relative strength index (RSI).
MiMedx has also broken out of its downtrend like the others, rallying from roughly $11.50 to $12.70 since early December. The RSI for the stock has also broken out of a downtrend, and a positive signal that the stock has further room to rise. There is a minor level of resistance around $14.00, about 10% higher than the current level. Should the stock be able to clear that level, the stock could rise all the way back to about $17, an increase of nearly 34% from current levels.
Clovis has also broken its downtrend and the RSI has turned positive. But unlike the others, it has a much more challenging path, with resistance first coming around $75, about 11% higher than the stocks current price of $67.75. But should $75 be cleared, it could have a nice run up to $84.50—a rise of nearly 25% from the current stock price. (For more, see also: Biotech Stocks May See a New M&A Wave in 2018.)
The biotech group tends to be one of the riskiest sectors in the market, and can turn winners into losers at a moment's notice. The stock with the most upside potential also means they have the most downside risk.
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.