Healing the biotech sector

December 25, 2015 01:00 PM

If you invest in Biotech stocks and you are still in the game after this year’s wild ride, then you are more courageous than most. Or, you are the one who has been driving sales growth in TUMS. 

Biotech stocks had been on an all-time rip, with the iShares Nasdaq Biotech ETF (IBB) running up more than 250% from January 2012 through July 20 of this year. In comparison, the S&P 500 was up about 57% during the same period. The next two months, however, which included the broad market sell-off in late August and Hillary Clinton’s famous Tweet in late September, were not as rosy.  All told, Biotech’s (IBB) dropped more than 27% in a little more than two months.

The smart move at that point was to head for the hills, right? Well, IBB gained about 16% back in the next month through October, and heading into November the question seemed to be: Is the recovery sustainable and are there still good opportunities to be had?

EidoSearch brings predictive analytics technology to these types of questions, specifically by analyzing the trading patterns in securities and generating statistics and probabilities that have been back-tested over 10 years with millions of predictions. We took a closer look at Biotech to see what type of information the patterns might contain, specifically analyzing trading patterns from the last six months in 33 Biotech stocks with market caps above $2 billion. We found some compelling data.

First, out of the 33 stocks we analyzed, only four were projected to be down at the beginning of February: Gilead (GILD), Anacor (ANAC), Juno (JUNO) and China Biologic (CBPO). This 88% positive projection rate for the industry was very high relative to other industries. For example, Oil & Gas E&P and Drilling companies project at 65%, Specialty Retail at 65%, Aerospace & Defense at 59% and Telecom Services at 50%.

At the individual stock level, there were many promising candidates but we found two in particular that were worth a closer analysis: Agios Pharma (AGIO) and Cambrex (CBM). 

For AGIO, based on 84 historical matches of their current trading pattern in the sector, the stocks are up 68% of the time in the next three months, an average of 10.6% with 3.5x the upside to downside. The relative return of the pattern (to the S&P 500) is also very high, at an average of 8.2%.

For CBM, out of 91 historical matches in the sector, the stocks are up 70% of the time in the next three months with an average return of 8.3%. We also displayed implied volatility in orange in the CBM chart, and you’ll see that our projected return distributions in blue (70% probability) show much less downside volatility than the market was pricing in at the time of this writing.

About the Author

Dr. Steven Zhang is the CEO at EidoSearch.com, a  Ph.D. in electronic engineering and an internationally renowned expert in information processing technologies. His expertise is in the areas of signal processing, multimedia content analysis, computational intelligence, pattern classification, as well as, applications in bioinformatics and finance. 
@EidoSearch