Biotechstocks have a history of volatile moves, but the swings
in thisissue could make the calmest trader seasick. Between April
2009 and April 2010, biotechstock
Dendreon (Nasdaq: DNDN)
surged nearly 2,000%, from a low near $2.60, to a peak near
$54.
By July 2011, as management cut sales estimates of its flagship
product, the stock had given up 80% of its value and fell to a low
near $10.40. There was a countertrend rally to the mid-teens, but
after falling to the mid-$3 range,shares can now be picked up in
the low $6 range.
Here's what makes me excited now about the stock technically. It
has broken amajor downtrend line going back to mid-2011. In
December, Dendreon cut through resistance just above $5 like a
knife through butter. True, there is some resistance in the $7.80
area, but if this barrier can be exceeded, then the stock could
move quickly to between $10 and $12. The shares are volatile, but
in this case, volatility would be the trader's friend.
Dendreon's extreme moves are driven by traderspeculation about
the promise of its drug pipeline in general -- in particular its
flagship prostate cancer drug, Provenge. The 2009 to 2010 rally was
based on traders' anticipation and then the formal FDA approval of
the drug. However, following approval, the stock paradoxically
stalled, and then sank because adoption by the medical community
was slower than the company anticipated.
However, sales of Provenge are slowly ramping up, as the medical
community becomes more comfortable with it. In 2011,revenue from
Provenge was about $228 million. Last year, sales of the prostate
cancer drug increased to about $240 million. Sales could also get a
big boost from European approval, which could take place in the
middle part of this year. Dendreon management anticipates this
approval, although management can be wrong.
The technicals certainly paint a renewedbullish picture for
Dendreon's stock.
In late July 2011, shares were trading near $40. At that time,
management sharply cut revenue estimates for Provenge, and the
stock was slammed. Within weeks, it plummeted to below $10,
rebounded slightly, and then sank as low as $6.46. A rally brought
shares back to around $17, which provided a second point on the
major downtrend line. But by October 2012, they reached a low of
$3.69.
Since hitting this October low, shares have steadily climbed,
and aminor uptrend line has formed. In early January, the major
downtrend line was broken, a highly significant bullish signal.
Shares are now creeping up toward important resistance near
$7.80. If $7.80 resistance can be broken, then the stockwill
bullishly complete a base. According to themeasuring principle for
the basing pattern, calculated by adding its height to the breakout
level, shares could reach a target of $11.91 ($7.80-$3.69 = $4.11;
$4.11+7.80 = $11.91). At current levels, this target represents 91%
returns.
The bullish technical outlook is supported by solid
fundamentals. For the full 2012 year, analysts project revenue will
surge 52% to $323.8 million, compared with $213.5 million last
year. Analysts anticipate first-quarter 2013 revenue will increase
2% to $83.7 million, from $82.1 million in the comparable year-ago
period.
As often the case with high-risk, high-reward biotech stocks,
theearnings outlook is not as upbeat. Analysts expect full-year
2012 earnings will be -$2.81 per share compared with -$2.31 per
share in 2011.
However, by the first quarter of 2013, increased demand for the
company's leading cancer fighting drug should help push earnings to
-43 cents per share, compared with -70 cents per share in the
year-ago quarter. For all of 2013, the analysts who follow DND
stock expect a significant narrowing of losses from -$2.81 to
-$1.34.
Risks to consider:
Dendreon is highly volatile stock. If Provenge fails to receive
approval in Europe, the stock could take a beating. While
management anticipates European approval, on more than one occasion
I have known company officers to be overly optimistic. My strategy
will therefore be to set a relatively tight stop allowing for a
loss of about 10%, but if the stock fulfills the measuring
principle, profits of about 90%. That's a very attractive
risk/reward ratio of about 9:1.
Action to Take -->
Buy DNDN at themarket price . Set stop-loss at $5.68, just below
support represented by the minor uptrend line. Set initialprice
target at $11.91 for a potential 91% gain.
This article originally appeared on ProfitableTrading.com:
This Small-Cap Biotech Could be Your Ticket to
91% Profits