.. and Biotech Stock Bets

12/24/2004 12:00 am EST


Joe Sunderman

Vice President of Research and Development, Schaeffer's Investment Research

Using a cominbation of fundamental, technical, and sentiment-driven analysis, two analysts at Schaeffer Investment Research see opportunity in the biotech sector. Here's some commentary favorite ideas from Joe Sunderman and Nick Perry.

"Our technical readings suggest that the biotech sector is leaning toward the positive side of ledger," says Joe Sunderman . "We like the fact that the Biotech HOLDRs Trust (BBH AMEX) has been able to trend along its 10-day and 20-day moving averages. The index recently achieved a six-month high at its intraday peak levels before reversing. One stock from this group that looks especially appealing is Biogen Idec (BIIB NASDAQ). Over the first few weeks in December, the shares of BIIB have been able to achieve something that has not been done in a couple of years - reach the 65 mark. Since February 2002, BIIB had been contained between the 63 to 64 range. For several months, investors have seen rally attempts dashed on numerous occasions, as the wall of resistance was too thick to overcome.

"It appears Christmas may have come early for BIIB investors, with the stock finally overcoming this level earlier this month. In our opinion, the shares are poised for more upside. Giving us confidence is the fact that BIIB has a respectable Equity Scorecard reading of seven (out of 10). The put/call ratio for BIIB ranks in the 98th annual percentile and stands at a lofty 1.04. Also, the number of "holds" and "sells" outweigh the number of "buys", which is an encouraging sign that more upgrades could further propel the shares. Traders should target a move to 73 with a stop-loss on a trade below 62.

"One sector that has been picking up steam recently is the biotechnology sector," adds Nick Perry, also an analyst with Schaeffer Investment Research. "The biotech sector could be inching its way into a market leading position. From our contrarian point of view, this up-and-coming sector might be well worth a closer look for potential additions to your portfolio. In addition to Biogen Idec, we also see several other opportunities in the sector:

"Sepracor (SEPR NASDAQ) added its weight to the sector after receiving FDA approval for an insomnia drug yesterday. The stock jumped 9.61% on the news to a new multi-year high. Furthermore, the equity has added more than 134% during the past year. What stands out on SEPR is the strong pessimistic sentiment despite the stock's impressive gains. This is exactly the type of action you want to see from our contrarian-based approach, as it is a sign that there could still be money on the sidelines. For example, there are more puts than calls in the front three months of options on SEPR and it would take nearly six days for all of the short sellerss to cover their bearish bets.

"Another potential outperformer from this group could be United Therapeutics (UTHR NASDAQ), a biotech firm with a market cap of less than $1 billion. While the shares have nearly doubled this year, the equity's short interest still represents more than 19 percent of the stock's total float--more than enough to spark a short covering rally on any positive news.

"Affymetrix (AFFX NASDAQ) has the look of a winner as well, with its Schaeffer's Equity Scorecard rating at 8.0 (with 10.0 being the highest and most bullish and 0.0 being the lowest and most bearish). AFFX's Schaeffer's put/call open interest ratio (SOIR) of 1.24 indicates that puts outnumber calls in the front three months of options. It also has been trending higher recently, suggesting increasing skepticism. Furthermore, the odds of a short covering rally are very high, as it would take nearly 11 days for all of the shorts to cover their bearish bets."

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