Best Price-Positioned Biotech Stocks, As Seen By Market-Makers

by: Peter F. Way, CFA


Market-Makers [MMs] are seeing strong biotech stock “order flow” from big-money fund portfolio managers.

MMs hedging to protect their capital temporarily put at risk to balance buyers with sellers on volume block-trade orders tells just how far the subject stocks’ prices may run.

Risk~reward tradeoffs for the many group stocks show most have favorable current prices with a few particularly attractive for wealth-building investors.

The big picture: Risks vs. Rewards

Figure 1.

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The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). The intersection of those coordinates by the numbered positions are identified by the stock symbols in the blue field to the right.

Only Enanta Pharmaceuticals [26] (NASDAQ:ENTA) above the dotted diagonal suffers worse drawdown exposure than upside price gain prospect.

Positions in the green area where reward prospects are at least 5 times the prior risk exposures include [6] China Biologic (NASDAQ:CBPO), Acadia Pharmaceuticals (NASDAQ:ACAD) at [8], Alexion Pharmaceuticals (NASDAQ:ALXN) at [4] , and GW Pharmaceuticals (NASDAQ:GWPH) at [12].

Their recent 6 months trends of daily price range forecasts are pictured in figures 2-5 below, where the vertical lines are forward-looking expectations for likely prices, NOT the backward-looking history of past actual prices pictured in stock "technical charts".

In each of the pictured price ranges the heavy dot marks the market quote at the time of the forecast. It separates the forecasts into upside and downside price change prospects.

The Range Index [RI] measure tells what percentage of the whole range lies below the then current price.

A row of data for each pictured stock tells what was produced by prior forecasts at RIs similar to today's. It includes their count, the average net gain payoffs actually achieved under a standard portfolio management discipline, how long they had to be held, the worst price drawdowns during those holdings, and the ODDS of having a profitable experience.

A small blue thumbnail picture of the distribution of prior Range Indexes during the past 5 years provides a perspective of the stock's present expectations.

Figure 2

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Figure 3

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Figure 4

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Figure 5

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Differences among the current best Biotechs

While all four of these stocks are among the most advantaged, there are considerable differences of appeal in their situations. Depending on the preferences and priorities of the investor any one may be favored over the others.

For example, the strong recent-day trend of price range forecasts for CBPO is outrunning its recent price progress, with no downside currently envisioned. That makes for an extremely negative Range Index now, today's being the lowest ever experienced.

The distribution of prior RIs for CBPO illustrates how extreme the current situation is. A sample of only one RI previously this low makes its experience statistically questionable, but of considerable interest. The persistence of the forecast trend is impressive, making the reluctance of other buyers appear to be either a remarkable opportunity or a concern worthy of further exploration. The choice depends on the nature of the investor.

ACAD likewise has a low RI in relation to its prior valuations, but instead of CBPO's strong uptrending expectations, it has simply maintained over the past few weeks a steady floor of limited downside expectations. Its present price is low relative to expectations, so only four prior RIs' experiences are available for examination, hence the red background of its sample size.

But those experiences are impressive. All have been profitable; their achieved % payoffs of +23% were larger than the +22% now being expected. Their top-of-forecast-range "sell targets" were reached on average in only 3 weeks of 15 market days, creating an extremely high CAGR of thousands of percents. A gain of over 20% in even a full 3 months would compound into an annual rate of more than 100%.

ALXN's prior experiences at this RI level - 22 of them - are also attractive and statistically credible, with ODDS of 19 out of every 20 (95 of 100) profitable. Done in average holding periods of 9 weeks of market days (two calendar months), they compound into better than a double annually.

But ALXN's declining trend of expectations may be a caution. Some investors might see it as a "falling knife" while others might look to prior price levels which suggest some resistance to further decline, making the present more of a time for positive commitment rather than waiting and possibly missing a good opportunity. Its prior numerous RIs only encountered average worst-case price drawdowns of less than -4%.

GWPH on the other hand just looks like a stock that has retreated to a point of attractive value in a range of expectation ranges that has been rather well maintained. All 4 of its prior low Range Indexes of 10 (9 times as much upside as down) have been profitable, in short holding periods of 27 market days (about a month and a week). From these low RIs the price drawdown exposure has been minimal, averaging normal market noise levels of little more than -2%. Its upside of +15% has been amply covered in prior opportunities.


The time to put more portfolio emphasis on biotech stocks appears to be at hand, with several of them at attractive reward~risk tradeoffs and only one out of 3-4 dozen at an appraisal of more downside than up.

At least four choice alternatives are present and any of those offer outstanding opportunities to build capital at generous rates with limited risk exposures and favorable odds for successful experiences.

Pick one, or more, and do it.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, has further information.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.