Although the stock market hasn’t been doing much over the past week — flirting with new highs but relegated to a rather tight trading range — one particular segment of the market has been blasting higher. And that’s biotech stocks.
This comes as traders have been moving into defensive, non-cyclical stocks as it become increasingly clear a broad market pullback is likely. Short-term technology measures are severely overbought. And the impressive gains of the last few month, with the S&P 500 up nearly 20% off of its August lows, has pushed sentiment to bullish extremes with small investors pressing their bets in the options market — with options hedging activity at a 10-year low according to Jason Goepfert at SentimenTrader.
Professional investors are cautiously creeping out the back door: According to UBS data, long-only mutual fund clients are selling stocks at a pace not seen since October 2007, which just so happens to mark the end of the 2002-2007 bull market.
Thus, the recent outperformance of health care, utility, and consumer stables stocks as fund managers move to “low beta” sector to protect their holdings against a decline. Cyclical, economically sensitive stocks in the semiconductors, technology, real estate, and transportation sectors are all showing serious underperformance relative to the broad market.
The strength in defensives, combined with the weakness of cyclical stocks, suggests investors have their doubts about whether the typical “Santa Claus” rally will materialize this year. But that doesn’t mean there aren’t profits to be made as this process plays out. Here are two high-flying biotech stocks that should do well over the next two weeks — both of which I’ve recommended to my newsletter subscribers for gains of more than 8% over just a few days.
Kendle International (NASDAQ: KNDL) provides contract research services to pharmaceutical companies looking to outsource the clinical testing portion of their research and development work. By focusing on this area, Kendle and its competitors can offer clinical trial management at a faster pace and lower cost than the drug companies can manage internally. The stock has been hammered over the last few years as drug companies pulled back their R&D spending to milk their existing drug portfolios and engage in large scale M&A activity.
But with a number of lucrative drugs going off patent soon, and with the rise of generic “biosimilar” drugs, mainline pharmaceuticals will have no choice but to reinvest in their R&D activities if they are to stay competitive. And when they do, cost will be a focus — increasing the demand and the value offered by Kendle.
There are already signs of improvement. Net service revenues for the third quarter totaled $83 million — the first quarter-over-quarter revenue growth in over two years. The company is profitable and trading well below the average analyst target price of $12.25. With a recent pop up and out of its month-long trading range, KNDL is on the move again.
Ardea Biosciences (NASDAQ: RDEA) focuses on the development of drugs to fight HIV and cancer. Shares broke out of nine-month pennant continuation pattern this week and look ripe for continued gains.
Disclosure: Anthony has recommended RDEA and KNDL to his newsletter subscribers.
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