Today, I am going to speak from experience about ways I have seen investors and traders be their own...
Coolcat's Biotech Trio
05/20/2015 10:00 am EST
Strong growth potential—and volatility—make stocks in the biotech sector prime candidates for consideration in Kevin Kennedy's Coolcat Explosive Small Cap Growth Stock Report. Here, he explains the strategy behind this newsletter and highlights some favorite small-cap biotechnology ideas.
Steven Halpern: Our guest today is Kevin Kennedy, editor of the Coolcat Family of Newsletters and the flagship, the Coolcat Report. How are you doing today?
Kevin Kennedy: Steve, I’m doing great. It is a pleasure to talk with you.
Steven Halpern: Today we’re going to focus on one of your more specialized newsletters, the Coolcat Explosive Small Cap Growth Stock Report. Could you tell our listeners a little about the goals of the newsletter, and also, if you could touch on where you consider the stock picks in this letter to be along the risk spectrum?
Kevin Kennedy: Sure. Well, the Coolcat Explosive Small Cap Growth Stock Report has been published since 1997. It is the oldest report of the three I publish; like all my reports, has a couple model portfolios with buy and sell suggestions. It focuses on micro-cap and small-cap stocks with a market cap of less than two billion.
These smaller stocks are typically more volatile than bigger companies so the potential rewards are greater but so are the risks. I try to deal with that by buying strong stocks when they stop going up and rest for a while and then start to head back higher. What that does is it gives you a potential stop point just below the low of the pullback and allows you to keep any losses small.
Maybe you’ve got a stock that goes from $5 to $10 and it pulls back to $8 and starts heading higher. I’m going to use a stop, basically, right below the eight, and maybe I’m buying it at $8.50, or $8.75, or something, so I am able to keep the losses fairly small. If the stock moves up, I’ll move the stop up below a more recent low.
Using this approach in our small investor portfolio this year, we’ve been able to average gains in the winning positions of 32%, while the losses and the losers have been contained to an average of 8%. That is basically what we are trying to do; make some money when we we’re doing right and not lose as much when we are doing wrong.
Steven Halpern: One area that you cover frequently in the small-cap services is biotechnology; are there any specific criteria that you assess when looking for winners among biotech stocks, say, as opposed to the more general just small-cap stock issue?
Kevin Kennedy: Well, it is pretty much the same things I’m looking for in all my stocks. I want a stock that is just starting to emerge after hitting bottom and typically making a key multiyear low.
Then, typically, those stocks hit bottom and they start to show some strength and eventually they go positive for about six months in a year and ideally they make new 52-week highs.
I’m trying to find them on that first pullback after they make a high. You also want to look at strong sectors and kind of keep going to those sectors when you are having good results. Biotech has definitely been in that category for me. It has probably been the strongest sector since the 2008-2009 bear market.
I track the Nasdaq biotech index and it is up six-fold since the 2008 lows. It was up 32% in 2012, 66% in 2013, 34% last year, and it is up another 16% this year. We’ve had a lot of biotechs this year that have given us pretty good gains in the 30% to 60% area—such as Agenus (AGEN), Alder Biopharmaceuticals (ALDR), and SAGE Therapeutics (SAGE)—so you want to keep going to the well.
A couple things, though, that are really important with biotech stocks is, a) most of them are losing money so it is important to compare how much they are losing each year with how much cash they have on hand so you can make sure they’ll survive; b) next thing you want to look for is that they have a fairly deep pipeline.
You don’t really want to have a stock that is kind of betting it all on one drug, because they can really go downhill if they have bad news from a trial or whatever.
And c) the third thing you probably want to look for with biotechs is that they have some strong partnership with bigger biotech companies, which typically will give them milestone payments or are going to collaborate with them and the actual development of the drug.
Steven Halpern: Let’s take a brief look at some of the small-cap biotechs you currently hold in your portfolio, and one is Five Prime Therapeutics, with the symbol (FPRX). What is the story here?
Kevin Kennedy: This is a fairly recent addition. We added this to our small investor portfolio April 14. It focuses on therapeutics of cancer and inflammatory disease processes. They’ve got a number of candidates. Some of them include drugs that are for the treatment of rheumatoid arthritis, multiple cancers such as gastric cancer, and small lung cancer, and even mesothelioma.
They’ve got deals with some of the biggies like GlaxoSmithKline (GSK) and Bristol Meyers-Squibb (BMY), so this is basically about a $500 million market cap company. They do have some sales, $19 million.
They are losing money—like I said, a lot of these are—but they’ve got almost $6 in cash. The stock is up 56% in the last year but it has fallen 26% off its highs. It is not too far above right now what I consider a good stop in the low $19 area.
Steven Halpern: You also highlight Emergent Bio-Solutions with the symbol (EBS). What is the attraction with Emergent?
Kevin Kennedy: This is a slightly larger company. It has a market cap of a little more than one billion and actually has sales of $450 million. For a biotech, it is trading at less than three times sales, which is pretty impressive.
This is a stock that has been doing well for a few years and they basically came on the scene when the Anthrax scare came and they developed a vaccine for Anthrax.
They’ve expanded in some other areas, some other drugs. They’ve got a deal with Pfizer (PFE). They are a pretty solid company and they’ve done well. They pretty much come from $13 in 2013, when they kind of bottomed out and they’ve trade as high as $31 and they are a little bit below that right now; so it is a pretty good technical set-up.
Steven Halpern: Now, finally, let’s look at Concert Pharmaceuticals, with the symbol (CNCE). What is the story with Concert?
Kevin Kennedy: Concert is the smallest company of these three. It has a market cap of about $300 million. Does have some sales, about $9 million, so that is not a lot, but you do want to see something.
They are developing small molecule drugs for the central nervous system disorders, genetic diseases, renal disease, inflammatory disease, and cancer. They’ve got a number of…again, they’re not betting it all on one stock and again they’ve shown pretty good gains.
They bottomed out in the $7 range last year and have traded as high as $18 and they’ve pulled back a little bit. They’re in the $14 range and have a nice stop. Basically, I’m looking at a stop just below $13, so I’m not giving it a lot of room.
We’ve had this in our portfolio since December and it is up about 20%, so we’re just basically trying to book those gains, but if it wants to go higher we’ll let it.
Steven Halpern: Again, our guest is small-cap expert Kevin Kennedy. Thank you for your time today.
Kevin Kennedy: Thanks, Steve. Talk to you soon.
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