Wednesday, April 04, 2007

March performance update and plans for the summer

March brought in some volatility but little in form of a net correction. Because of the high probability of an economic slow down (I talked about it before here) and the anticipated lower earnings growth rate for US corporations, I still maintain a negative bias on the market. Having said that, I do plan on letting the winners run but mostly, cutting some losses and preparing for a better buying opportunity in the coming months. Click on the image below for a table of results. Overall, my biotech picks have lagged behind non-biotechs which I think should change going forward.

GILD and CEPH are clear winners and should be held (let the winners run!).

at $55 is a notable disappointment but I did declare a sell recommendation at $60. Also, ARNA and ALTU, both small cap biotechs, have been serious under-performers. If you look at the differences in the performance of BTK ( mid to large cap biotechs) vs. the NBI ( all biotechs) the under-performance of the small caps become evident ( click here for a previous article on these indices). The NBI lost 6% since February while the BTK gained a couple of percentage points. I do plan to keep both ARNA and ALTU since there has not been any negative fundamental news. I also missed out on Dendreon's (DNDN) great jump ( over 2 fold rise overnight). I, much like most investors, thought it was a very risky proposition given the novelty of their prostate vaccine. I will keep DNDN on a watch list.

One stock to keep an eye on is Vertex Pharmaceuticals (VRTX) on Apri 13th they will announce updates to a clinical trial done with 2o patients comparing their HepC drug Telepravir with standard of care therapy ( gamma interferone and Ribavirin) with SOC alone. Investors are looking to see how many of these patients achieved undetectable viral levels and how fast as well as the level side effects and drop out rates in these patients compared to control. I believe these results, even if not perfect, will remind us that this product has a place in improving the lives of these patients and other existing larger trials with hundreds are patients will give us better statistical data. The fact that these clinical trials have had no adverse outcomes (yet) is a good sign and I think the stock has some upside potential from these levels in the short term. So a short term small long call option position may be a good insurance against a large upside pop. VRTX is also a great story for the long term investors.

I have also been happy with my options strategy to take advantage of the volatility and mis-valuation of biotech stocks. Most of my put and call writing have resulted in gains and caused a small boost to portfolio earnings. I think 2007 will be a decent year for Biotechs since the revenues on these companies are not directly related to the macro economy and therefore not as sensitive to a slowdown. Going forward I am looking for opportunities for writing puts (partially hedged) on companies with great earnings and momentum. This strategy will work on most scenarios except a large down move of the stock, which I think is not very likely in this sector. But to be conservative, one should look into three months out and at least strike prices at least 10% below current levels. However, one must be careful as this strategy has unlimited upside risk! So these open positions must be monitored carefully and hedged properly based on the size of the position and acceptable risk levels for each investor.

Disclosure: my holdings are all included in the table above.