Betting on Bounce in Biotech

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
As we enter the start of earnings season, it’s time to up your bets on stocks going into what traditionally has been the strongest quarter for the stock market.
Among the fast-growing major biotechs announcing earnings in the coming weeks is this week’s Bull Market Alert recommendation, Connecticut-based Alexion Pharmaceuticals (ALXN). I first recommended this stock back in April. Here’s why I think it is set to do well, again.
Despite the sharp pullback in the markets since early August, health-care stocks have held up very well. ALXN itself has risen steadily on expectations of more approved uses for its only drug on the market, Soliris.
 
Soliris today is the only drug approved to treat a rare blood disorder called paroxysmal nocturnal hemoglobinuria (PNH). PNH is life-threatening, and the drug can cost a patient $400,000 for full treatment.
 
But ALXN is also expanding Soliris’ label — that is, the diseases Soliris can be used to treat. On Sept. 26, the U.S. Food and Drug Administration (FDA) approved Soliris’ use to treat a disease called atypical hemolytic uremic syndrome, or aHUS. And the European Committee for Medical Products for Human Use, or CHMP, recommended that the same indication be extended to Soliris in Europe. Alexion expects final European Union (EU) approval in about two months. 
 
There was further encouraging news for Alexion last month when Soliris fared well in a mid-stage study which evaluated the drug in another indication. The study involved patients suffering from severe and refractory generalized myasthenia gravis (gMG). Encouraged by the positive results, the company intends to evaluate Soliris for the gMG indication further.
 
As you would expect with a typical biotech stock, Alexion is all about growth. During recent quarters, year-over-year earnings per share (EPS) has grown 36%, 33%, 32%, 63%, 58% and 45%. Sales growth in recent quarters has jumped 34%, 43%, 45%, 36%, 38%, 41% and 48%. 2011 and 2012 annual EPS estimates are for gains of 34% and 39%, respectively.
 
Alexion will report its financial results for Q3 on Thursday, October 20, 2011, before the financial markets open. The stock might see a pop, as Alexion has a habit of beating Wall Street expectations, having done so for five straight quarters.
 
So buy Alexion (ALXN) at market today, and place your stop at $49.50. Having closed Friday at $65.18, I’m looking for the stock to hit at least $76.00 — about 17% upside from current levels — before taking profits. If you want to play the options, I recommend the February 2012 calls (ALXN120218C00065000).
 

Portfolio Update

 
Bank of Ireland (IRE) ended 11.65% lower for the week. IRE’s stock price recently took a hit on news that the Moody’s ratings agency downgraded the credit ratings of 12 U.K. banks. On a more positive note, the head of Ireland’s debt management agency stated Thursday that Irish bank de-leveraging targets were still achievable. This is a critical point, as this target is an agreed-upon part of an EU-International Monetary Fund bailout. With the Irish economy now growing for two straight quarters, I am now even more bullish on this stock. IRE is a HOLD.
 
National Bank of Greece SA (NBG) dropped 23.08% during the past five trading days. Shares of NBG dropped on Oct. 3, as Greece approved $8.8 billion in austerity measures that fell short of expectations. To make matters worse, there is speculation that Greece may not get approval for its next tranche of aid. This double-whammy of bad news has hurt NBG shares. NBG is a HOLD.
 
Spreadtrum Communications, Inc. (SPRD) gained 5.39% last week. On Oct. 3, Spreadtrum announced completion of a majority acquisition of MobilePeak Holdings, Ltd., a provider of WCDMA wireless solutions. This will allow SPRD to compete effectively in global 3G and LTE (4G) wireless networking markets. This event coincides with strong upwards price movement off of SPRD’s 50-day moving average. SPRD paid a $0.05 dividend on Oct. 6. SPRD now is above its 50-day moving average and is a BUY.
 
ProShares UltraShort MSCI Emerging Mkts (EEV) fell 7.84%. The markets logged steady daily gains last week and this reflected negatively in your “hedge” position. However, the S&P 500 Index (SPX) stumbled Friday as its chart tested resistance at the 50-day moving average. With the iShares MCSI Emerging Mkts (EEM) and SPX trading in tandem, your hedge may play an important role this week if a short-term trend reversal ensues. EEV is currently a BUY.
 

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