Q: Is There A Generational Opportunity In Biotech Stocks?

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A: There Just Might Be, Yep

by Alex King, Cestrian Capital Research, Inc

We recently introduced biotech coverage to our Inner Circle research service. I’d like to say that this is because I had an epiphany about the sector and its obvious looming promise, but the real reason is that we were lucky and caught Nathan Brinkman at just the right moment in his career. Nathan is a three-decade biotech professional with investment experience to boot. I’m delighted he’s chosen to develop our biotech strategy here at Cestrian.

As luck would have it though, I think we may be at “a moment” in the industry. As we have added a series of major biotech stocks to our coverage, one common factor has stood out, which is the stock charts. They all have the same chart. A huge run-up, then a dump of epic proportions, and now forming a base which looks to be starting to break out (or in the case of some leaders, has already broken out).

These base-breakout patterns, when formed over a period of years as is the case for these names, can be exceptional opportunities to take long positions - because the risk/reward setups are compelling. Usually there is a fairly sensible place to put a stop not too far below the entry price - so the downside is acceptable - and if early in a “wave 3” type upside shot, the upside potential vs. the defined downside risk can be a very compelling ratio. Generally I think anything with a 2:1 reward:risk is OK if you can point to a supportive chart that you have constructed in good faith without trying to fit the chart to your desired outcome. Anything at 3:1 or better is a great setup in my view.

Biotech, in short, looks like tech did in late 2022 / early 2023.

It looks that good.

It may not play out that way, no-one knows the future for sure, but if you use sensible stop levels and can play for the upside, then this sector may well surprise, in my view. I personally am positioned accordingly.

Let’s run through three setups.