This commentary originally appeared on Real Money Pro at 10:00 a.m. on Jan. 15, 2016. Click here to learn about this dynamic market information service for active traders.
The market staged a nice rebound Thursday as equities clawed back a good portion of Wednesday’s losses. Helping the rally was crude oil, which had a rare up day in 2016. Also positive were comments from St. Louis Federal Reserve President James Bullard that came off as dovish, and better-than-expected earnings from JPMorgan Chase (JPM).
One area showing a huge turnaround Thursday was the beaten-down biotech space. The sector started the day with significant declines, but led by some of large-cap growth plays, including Amgen (AMGN) andAbbVie (ABBV), staged a substantially rally. As the day wore on the rally broadened into the small-cap portion of the group, which has been crushed recently. Hopefully, after deep losses to start 2016 this marks the beginning of a larger rebound, once we get some stabilization in oil and China.
I continue to put the vast majority of additional funds I am allocating to biotech on dips in the overall market to large-cap core growth plays offering attractive valuations based on their long term growth prospects.
However, investors who want to slowly move out on the risk curve should consider the smaller caps that have delivered good news recently, only to have their stocks go down anyway. When sentiment does shift, there could be a delayed, but substantially positive response to their share prices when traders are again investing based on fundamentals, instead of fear.
Dynavax Technologies (DVAX) certainly fits in this category. The stock traded up to $32.50 last September on hopes that an upcoming phase III trial for its hepatitis B vaccine would be positive, leading to FDA approval and “Heplisav-B” quickly garnering at least half of the $600 million to $700 million annual market. A few weeks ago, the vaccine proved effective in trials and is in all likelihood heading to approval and commercial launch later this year. The stock now trades at about $23.
Another small-cap being treated unfairly in this sharp biotech bear market is Relypsa (RLYP). Late in 2015, the Redwood City, Cal.-based company’s first commercialized product “Veltassa” was approved and launched. The stock rose past $30 as its primary competitor was bought out for a large premium and speculation swirled of several firms circling Relypsa.
Takeout talk had Relypsa priced at $75 a share in a potential buyout. However, now that “animal spirits” have approached coma-like levels in the sector, the stock trades around $20.
Finally, shares of Merrimack Pharmaceuticals (MACK) traded above $12 early this summer on hopes the FDA would approve its first commercial compound “MM-398.” The FDA provided that approval in late October. Nevertheless, the stock is changing hands at just over $6.00 — half of its previous highs.
None of these names are likely to stage big rallies until the environment for high-beta sectors improves. But when that eventually occurs look for these stocks to be strong performers.