Fellow Investor,
After having a solid first three weeks of June, the biotech sector has basically given up all of its gains from that timeframe. The market has gone more into a “risk off” mode due mainly to the unfurling drama in Greece and whether a “Grexit” is finally in the offing. Not helping sentiment is the second largest economy and stock market in the world, namely China, has a market that is looking more and more like it is in a freefall. Equities after having a massive run over the past year have plunged more than 20% over the past three weeks. Given valuations, as well as the amount of speculation and margin still in the market, things could get much worse in the Middle Kingdom before they get better.
In addition, Puerto Rico chose last week to announce that it cannot pay the over $70 billion in outstanding debt obligations it owes and that is crippling its budget and economy. This is an opening gambit to commence negotiations with creditors for concessions and has the potential to roil the municipal bond market given how much debt many Americans own in their municipal bond mutual funds due to the island’s triple tax exempt status. Finally, interest rates have risen nicely over the course of the second quarter providing another headwind to high beta sectors like biotech, especially the small cap portion of the sector.
As can be expected, small cap performance within this arena has been weak over the past couple of weeks. Most of our smaller plays have fallen along with this sub-sector. I expect weakness in this area to persist over summer while the market works through its myriad worries. This is why we continue to build the Biotech Gems portfolio in a methodical and prudent fashion. In this month’s issue we add another large cap core position as well as another speculative but attractive small cap selection.
The one exception to the recent weakness in the sector and portfolio is Synergy Pharmaceuticals (NASDAQ: SGYP) which has been the star of the portfolio so far notching an almost 90% return since its inclusion. This is an excellent example of why one must take small positions across a myriad of small promising stocks in this volatile space. There are always going to be misses due to the complexity of the drug approval process. However, when success occurs the results can be substantially positive to your portfolio. Anyone who booked any part of the 464% return on Eagle Pharmaceuticals (NASDAQ:EGRX) in six months within the Small Cap Gems portfolio knows exactly what that can feel like.
I also will remind everyone of the Jensen Rules when culling profits in this high beta space. You should take 10% of your original share stake off when a stock gives you a 50% return. If the stock has doubled, you want to take 20% more off. Finally, if you are fortunate enough to achieve a quick triple you move 20% of original stake to cash as well. This leaves you with a guaranteed and half your original stake riding on the “house’s money”, a no lose situation. For subscribers that got in with me on Synergy when its recommendation came out this means you should have cashed out 10% by now and be ready to move another 20% to cash when the shares hit around $10.00 a share, depending on your entry point.
I hope the Biotech Gems community had a long and relaxing Fourth of July weekend. The third quarter looks like it could have more volatility than the first two quarters of the year. On the bright side, lower entry points are a distinct possibility in the months ahead. We will issue a supplemental edition with 1-3 new additions depending on what if any pullback the market provides in a few weeks.
Click here for this month’s issue.
Thank You & Happy Hunting
Bret Jensen
Editor, Biotech Gems