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I like trading biotech stocks under $10. These little dynamos can be powerful wealth creation tools if wisely chosen and traded within a well-diversified portfolio.
I am sure I don't need to say it to any experienced investors, but a word of caution is needed whenever mentioning biotech trading. Biotech stocks are notoriously volatile and can be an account killer if not managed with the utmost respect for risk.
Knowing which biotech stocks to buy and which to avoid is a science in and of itself. This process can become so complicated that often the best biotech investors are medical doctors or pharmaceutical research PhDs. These individuals can drill into the scientific nuances of the various biotech products to determine the ones that have a high chance of success.
Well, what about the rest of us -- those of us without high-level degrees in the sciences? Is success still possible trading biotech stocks?
I answer this question with an unequivocal yes. I have broken down the components of a successful biotech company into five easy-to-understand traits. While it is possible that a company possessing all five traits could still flop, it is a near certainty that if a biotech stock does not possess every one of the five traits, it will struggle to survive.
Here are the five traits every successful biotech company has:
This is perhaps the most important criteria. It is the management that makes the decisions on how to allocate the company's resources for the best chance of success. Biotech managers need more than entrepreneurial zeal, they need scientific, pharmaceutical or medical backgrounds.
Correctly managed, debt can help a company navigate rough patches between funding. Mismanaged, debt will sink the company faster than the Titanic. Remember, the less debt the better when it comes to biotech companies.
Along with low debt levels, successful biotech companies must have sufficient funding. Funding is what allows for research and will keep a company alive during the long, arduous drug approval process.
Avoid single-product companies. Companies with multiple drugs/products in the approval pipeline have a better chance of one of the products reaching the marketplace. While it is possible for a single-product firm to thrive, the odds are always better with multiple products.
Products Close to Launch
Investing in companies with products/drugs close to being approved will increase your odds of success. Avoid those firms with product approval a long way off. When I find a biotech stock with products not close to approval, rather than invest, I place it on a watch list for potential future investment.
I recently discovered an exciting opportunity in a biotech stock that is actually trading under $5. This company meets all five of the above criteria, and I think it has solid odds of continued top performance.
The firm I am happy to share with you today is Biodel (NASDAQ: BIOD). Founded in 2003, Biodel is a Danbury, Conn., based specialty biopharmaceutical company. It specializes in the development and commercialization of treatments for diabetes. The company has several intriguing products in the pipeline, but its ultra-fast-acting insulin product known as Biod-123 is what is causing investor excitement.
The last patients have completed the Phase II clinical trial and results are expected to be announced by the end of September. I won't get into any scientific lingo, but the results are expected to be positive. Investors have sent the biotech stock soaring more than 80% this year on speculation of positive trials.
Biodel is not a one-trick pony, as it has three additional products in the pipeline. These include Biod-250, Biod-531 and a Glucagon Rescue Kit, and all are showing promise.
The company boasts a market cap of just over $60 million with $28 million in cash raised from a secondary offering and no debt. It has over 14 million shares outstanding with a float of nearly 8 million. Biodel's short ratio is 0.70, and over 61% of the shares are institutionally owned.
Technically, shares have soared from under $3 to just over $5 in the past four months. However, BIOD recently pulled back and is consolidating between $4 and $4.60. I like this stock as a two-entry play -- buying 50% of your expected total position on a breakout above $4.60, and then buying the other 50% on a breakout above $5.25 makes solid technical sense.
Recommended Trade Setup:
-- Buy BIOD on a breakout above $4.60 and again above $5.25-- Set stop-loss at $3.79-- Set price target at $8.35 for a potential 82% gain in 90 days
As a die-hard value investor, I struggled with its valuation in the past, but now I'm ready to pull the trigger.
Following a breakdown, there are simply too many bearish technicals on its chart to ignore.
As bearish trends take hold, this pick has become an overpriced company in a struggling sector.