Stocks & Commodities V. 29:7 (48-49, 55): Profiting In Biotech by Mark Messier and Jeff Dos Santos

Profiting In Biotech by Mark Messier and Jeff Dos Santos

Is biotech the way to go?

IS biotech investing the same as investing in slots? Is there any way to consistently build wealth in this sector? Many investors avoid biotechnology altogether, appalled at the prospect of stocks that can nosedive over 60% within minutes, while others are attracted to the extraordinary gains possible for companies that receive Food and Drug Administration (Fda) approval. All investors wonder: Is biotech investing a hopeless gamble? Without knowing what the Fda will decide beforehand, is there a way to trade biotech stocks with a high probability of success?

BUY THE RUMOR

It may come as a surprise, but there are ways to make low-risk trades in the biotech sector. In this article, I will explore a trading method built around a predictable anomaly of stock performance that is unique to the biotech sector.

The anomaly is the application of the “buy the rumor, sell the stock” mentality to Fda decisions. Here is the secret: Shares of biotechnology stocks tend to rise in the weeks and months prior to major Fda decisions. Let’s call it a “bio runup.” This runup allows a trader to profit from the increase in shares of companies well before any major Fda decision date, simply due to the speculative rally in the stock prior to the decision. A bio runup trader tags along for this rally prior to the announcement, but selling before the Fda makes an announcement. This is the “buy the rumor” concept in its purest form.

It’s simple and theoretically sound, sure, but does the behavior of public markets actually support this strategy? I will examine all Fda decision date runups from last year and see if there might have been a way to build wealth using the bio runup method.