My Favorite Sector for Summer 2012: Biotech

If there’s one thing the month of May has reminded us, it’s that stocks can really suck in the summertime. Despite last week’s 1.7% rebound from the S&P 500, the index still is in the hole by 6.1% for the month, and the next couple of months don’t exactly look encouraging. No sector looks immune to the past and future tepidness either, save perhaps one: biotech.

What makes this sliver of the health care sector better suited to survive — and even thrive — between now and the end of September? Three reasons:

1. Biotech trades independently of the market: Think every industry is dead money during the summer? Think again. Going back to 2000, the Merrill Lynch Biotech HOLDRS ETF (NYSE:BBH) has returned an average of 8% between late spring and early fall, while the overall market has done well to break even during that span. The disparity verifies that the market’s rising and falling tide doesn’t apply universally — possibly because health care spending doesn’t ebb and flow with economic cycles.

2. Biotech investor conferences happen in the summer and run into fall: For those of you who were lucky enough to own Delcath (NASDAQ:DCTH) in the middle of 2010, you know what a big deal these events can be. Delcath shares ran from $6 to $16 before 2010’s American Society of Clinical Oncology meeting simply because of what traders thought the company might say during its ASCO presentation. Yet this stock’s rally is just one of hundreds of recent examples of breakthrough euphoria spurring a biotech name higher. A little attention goes a long way.

3. Biotech is en vogue again: While the first two points were good reasons to own biotech during the usual summer doldrums, there’s an extra “oomph” for the industry specifically in 2012 — the group has reignited traders’ love affair with the idea of big gains stemming from buyouts and breakthroughs.

To give credit where it’s due, GlaxoSmithKline (NYSE:GSK) and Gilead Sciences (NASDAQ:GILD) fanned these flames again late last year and early this year when the former bid for Human Genome Sciences — nearly doubling the price of HGSI in the process — while the latter purchased Pharmasset. These two moves were specifically intended to bolster the suitors’ hepatitis C pipelines, but the bidding war and competition gave the proverbial/psychological green light to other biotech deals across the entire spectrum of drug development.

Stocks to Watch

With those three reasons in the back of your head, there are some specific catalyst-ready biotech names you might want to keep on your radar.

For starters, you might want to keep close tabs on Vivus (NASDAQ:VVUS) and Arena Pharmaceuticals (NASDAQ:ARNA). Both currently have weight-loss drugs — another major recent theme — being considered by the FDA for final approval. Vivus’ Qnexa got the green light from the advisory panel in February, while Arena got the same nod for its lorcaserin in early May. Although this still isn’t the very last FDA hurdle these drugs need to clear, getting past the panel is a very encouraging sign. Both stocks already jumped on the milestone but could jump again if and when the Food & Drug Administration says “yes” to the drugs.

Galena Biopharma (NASDAQ:GALE) is another name worth keeping close … now. This biotech outfit has developed NeuVax, which is in Phase 3 trials for the treatment of several cancers. More important, Galena will be putting itself front and center as this year’s ASCO, which is being held late this week. The company will present “Safety and Long-Term Maintenance of Anti-HER2 Immunity Following Booster Inoculations of the E75 Breast Cancer Vaccine,” which will pretty much put the entire company on the inspection table. If investors like what they see, the stock could be off to the races.

Onyx Pharmaceuticals (NASDAQ:ONXX) and Celgene (NASDAQ:CELG) also are potential movers. Onyx’s Carfilzomib — a treatment for multiple myeloma — will be reviewed by the FDA advisory panel on June 20, and Celgene’s Revlimid — also for multiple myeloma — will be up for approval in Europe sometime before the end of Q3. And yes, myeloma is one of the budding “themes,” like hepatitis C was a few months ago.

Those are hardly the only decent possibilities, though. Indeed, it seems as if the biggest biotech winners are the ones nobody was expecting. For that reason, don’t be afraid to dig into a name nobody seems to care much about right now.

And either way, know that just as often as not, the wise move is to take your profits once you get that big biotech pop. The crazy-sized surges rarely keep going in that direction, so don’t dally — lock the gain down while you can, at least with half the position.

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As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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