For Immediate Release
Lessons of a Biotech Blowup
Most of us have experienced a big blow up in a stock we own. Hopefully it comes at a time when you are not leveraged on it, but it is bound to happen. Today, it is happening to me.
I write this Sunday evening, just a few hours after Celladon ( CLDN ) reported negative results for CUPID2 Trial. There is a conference call to review the trial at 8:30 AM EST and by the time this article I published that call will be long over.
Let's examine this play and take a look at how Home Run Investor (a paid service that I manage that looks for small cap stocks with big growth potential) made a quick gain on this play. Then I will take a look at the lessons from this rather painful episode.
I instructed the thousands of investors that pay for this service to buy shares of Celladon on February 27, and as I look back the write up explaining why we should put our hard earned money into this idea I shudder at the irony. I try to infuse a little humor my write ups, and this buy saw no exception.
I joked that I didn't buy it because "it sounds like the type of fish Jaws is ( megalodon ) or maybe was, I bought it because of an excellent pattern of increasing earnings estimates." The irony of course, is that I needed a bigger boat. We paid $17.78 as our entry price.
Home Run Investor doesn't always chase the hottest biotech names, but recently we moved on another stock that left us with a sour taste in our mouths. Of course we were also sitting on a gain of about 50% from Novavax ( NVAX ) after buying that stock in June of 2014 for about $4.50. A gain like that doesn't leave a sour taste though.
The bad play came from our January 16 purchase of Bluebird Bio ( BLUE ) for just over $97. The stock was rather volatile at that time, but we accepted some of that risk with the idea of putting on a rather tight stop. About two weeks later, that tight stop was hit and we exited with a loss of ~10%. Of course the stock quickly regained those loses and has soared to highs of $140+. Needless to say that wasn't my first biotech misstep and it probably won't be my last.
Fear Of Missing Out
After watching BLUE skyrocket, I fell victim to what recently has been widely diagnosed as FOMO or Fear Of Missing Out. What I was afraid of missing out on was the explosive moves in a select group of biotech stocks that made it look like the moon was in reach and Saturn was only a short hop, skip and a jump away.
So I looked into who else was reporting data around the time that sent BLUE skyrocketing. Celladon was the simple decision that was almost made for me. I craved that extra risk, but tempered that risk with a good Zacks Rank #2 (Buy) at the time. The Zacks Rank is based on the revisions of earnings estimates by major brokerages like Stifel and Goldman Sachs and others.
The Case For CLDN
Earnings are a primary driver for our investment decisions. At the time, we saw the Zacks Consensus loss per share for CLDN shrinking from $1.88 to $1.74 for 2014. The 2015 number was also looking better and better, as it moved from a low of -$1.63 to -$1.31. The stock was poised to see estimated losses shrink by 25% to 30%.
Wall Street was taking notice of Celladon and Wedbush raised their price target from $17 to $29. Down the road, Roth Capital would initiate coverage on the stock with a buy rating and a sky high price target of $70. Others would follow with buy ratings and price target that were many multiples of our entry price.
There was also the confirmation that comes along with major buys from institutional investors. Eagle Asset Management had disclosed a 9.5% stake and that was followed GBS BioVentures buying in for 5.75% on March 6, a position that was disclosed after the markets closed that day.
One Big Week
It only took CLDN a week to run from $17 to more than $25 - and to me, that was more than enough for subscribers of Home Run Investor. We sold the stock seven days after buying and captured a healthy gain of 36.8%. This isn't what Home Run Investor is all about, we target 6-18 month holding periods that try to avoid "trading" stocks.
I told subscribers that this was a strong stock in a weak market and I didn't want to look this gift horse in the mouth.
Since That Trade
I kept an eye on CLDN after we sold it, and saw it pop up over $28 only to slide back down to $23. The flow of good news continued as the company set up a development, manufacturing and supply agreement with Novastep.
There were more notes from research analysts and some more 13G filings with the SEC. Those filings meant more institutions were taking or adjusting positions in front of the release of the data.
When the stock dipped below $20 I personally took a stab at it. Why not? Home Run Investor was out and my conflicts were removed. This had so many indications that success was not only imminent, it was likely.
Someone Knows Something
Many will suggest that there was a data leak. I don't feel that way, but a deep understanding of all the risks was probably lacking for many investors. Those price targets of $70 and $51 were blinding, especially when they are backed up by multi-million share purchases from "smart money" institutions.
I am not a fan of technical analysis, but those that follow charts were able to see that this stock was doomed for failure. That idea leaves no consolation at the feet of those who were long the stock based on something as wild as a fundamental call.
At the end of the day the negative data leaves us with a choice. Do we continue to hold the stock or should we sell into what will inevitably be a rush to the exit. Therein lies the rub.
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