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Under $6 Biotech Stock Gearing Up for a Potential 67% Breakout

Stock picking is both an art and a science. I first started investing in the pre-PC era when information was difficult for the average market player to access. Investors needed to rely on corporate reports individually mailed via snail mail, newspapers and thick books of market data sometimes available at libraries. 

I'll never forget painstakingly plotting out a price chart on special graph paper with a pencil and ruler. If you wanted a daily chart for a month, you needed to go back to a newspaper or data book to obtain the daily numbers and place each one by hand on the chart. It was a brutally slow method of analysis. Investors were starved for information.

Today, the opposite is true. Since the advent of the Internet, investors have been overwhelmed with charts, news, information and data. Stock picking today involves eliminating useless information and drilling down into the important metrics.

The question is, just what are the most important metrics when it comes to finding profitable investments? 

Every day, I like to run screens to locate stocks poised to potentially make a profitable move. The metrics I search for are both fundamental and technically based. I consider this part of the stock picking process the science since it deals with hard data. 

The art comes next when it's time to predict how a stock will perform provided the current economic environment. Remember, all the metrics can be wildly bullish on an individual stock, but environmental factors can quickly squelch upside potential. 

Before I get to today's pick, here are the three top factors I screen for to narrow down the stock universe to just a few names:

1. 50-Day and 200-Day Simple Moving Averages

I screen for stocks pressing up against their 50-day or 200-day simple moving averages (SMAs). A breakout above these averages will attract investors as technical trade programs are often keyed to a breakout (or breakdown) of these levels. 

2. Insider/Institutional Buying

I only consider stocks that insiders and/or institutions are purchasing. If I notice more selling than buying, I avoid that stock. The theory behind this is that smart money at institutions and insiders at the company have more information than the average investor. If they are buying, it could signal a potential move upward on information/research not yet in the public domain. 

3. Positive News

Positive news can be any news story that has the potential to lift the stock price. I view good news as a catalyst that will entice other investors to purchase shares, thereby sending the price higher. The opposite is also true when it comes to shorting a stock.

Good news can include things like earnings beating estimates, a new product, mergers, acquisitions, FDA approval and a host of other bullish happenings. Every sector has its own bullish triggers. It takes a bit of experience to determine what types of news events have the most effect on the stock price. 

Presently, I use a program that scans the market for stocks fulfilling these three major points and other lesser price drivers. It can also be done by hand one step at a time. 

My most recent scan, applying the crucial stock picking criteria, revealed a very interesting stock in the biotech sector. This stock fits all of the guidelines to make a solid short-term investment.

Synta Pharmaceuticals (NASDAQ: SNTA) specializes in discovering and commercializing small molecule drugs that are targeted to extend and enhance the lives of individuals with cancer and chronic inflammatory disease. 

Boasting a market cap of nearly $396 million, over $90 million in cash, and a small debt load of about $24 million, Synta appears fundamentally solid. 

The company controls a unique chemical compound library gleaned from more than 20 years of industrial and academic sources. Built on top of this access, Synta has 800 patents and is in the application stage on the global scale for its high-tech and drug creations. 

Its most exciting drug candidate presently is Ganetespib. This drug is for breast, colorectal, lung and hemolytic cancer patients. The drug is designed to inhibit a molecular chaperone that is essential for the function of the most fundamental drivers of cancer cell growth. Putting aside the technical jargon, this drug is showing promise in hundreds of patients and over 20 clinical trials. 

Let's drill down into each of the three factors that make SNTA a strong candidate for continued bullish growth.

Moving Averages

SNTA has bounced off of the lows around $4 and broke out above its 50-day simple moving average at $6 on Wednesday. While it has pulled back some since then, another breakout makes the stock attractive to trend following funds and investors who purchase breakouts above the major moving averages. It tells me that further upside is probable. 

SNTA Chart

Insider/Institutional Buying

Along with the promising drug candidate, this is what truly has me excited about the company. Hedge fund magnate and a Synta corporate director, Bruce Kovner, recently purchased about 3 million shares of the stock for $13.4 million. Mr. Kovner has been on the board of directors since 2002.

In addition, co-founder, President and CEO Safi Bahcall purchased 10,000 shares on June 6, and currently owns close to 2 million shares. And both the Senior Vice President/Chief Medical Officer Vojo Vukovic and board of directors member Robert Wilson also ramped up their holdings in the company.

Bullish News

On the news front, clinical trials for Ganetespib are suggesting that targeting Hsp90 may inhibit angiogenesis without tumor rebound effects associated with other therapies. Positive news like this powers biotech stocks higher. 

As you can see, SNTA fits each of the three primary stock screening criteria. This company is a very strong candidate for further bullish upside.

Recommended Trade Setup:
 
-- Buy SNTA on a break above the 50-day SMA at $6
-- Set stop-loss at $5
-- Set initial price target at $10 for a potential 67% gain in three months