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Biotechnology, Forward-Looking Growth, Trends

05/13/13 04:17:38 PM
by Billy Williams

There is a strong bull market in effect so it's important to single out the stock leaders who offer a combination of strength and forward-looking growth.

Security:   SPX, AMGN, ALXN
Position:   Buy

So far, the stock market has started off with a bang in 2013 and has defied every historical month-to-month pattern of trading behavior to date, which can only mean that while you should be aware of what the seasonal patterns are, you should give greater priority to what price action is doing at present. And, all signs point to the market going higher as a steady series of higher highs and higher lows continue to be created in the overall market as reflected by the S&P 500 (SPX) and the Dow Jones industrial Average.

Given that, it's important to look for segments of strength in the market where stock leaders are emerging since they have the highest degree of relative strength and the greatest amount of volatility which gives them the edge in outperforming the rest of the market.

Investment capital moves to where it is most appreciated, meaning that the "smart money" is looking for areas of the market where compelling fundamentals and technical criteria are being made and then sifting through those stocks to find the ones that have the highest likelihood of achieving higher returns with the least amount of risk.

Figure 1. Trading at an all-time price high, the SPX is climbing higher and taking stock prices with it.
Graphic provided by:
Right now, biotechnology is emerging as a potential growth leader that offers a combination of key success factors that skilled stock traders look for to capitalize on.

One of the reasons that biotechnology is so compelling is that the companies that trade in the segment group are on the cutting edge of new technology that can improve the overall life expectancy of the customers it serves and, more importantly, help them achieve a greater sense of well-being while keeping potential life-threatening disease and ailments at bay.

Plus, there are a number of large-cap companies that are making strong headway in their markets within this industry group and whose stocks are strongly trending upward and taking the rest of the general market with them.

Figure 2. AMGN is a large-cap stock that has a number of compelling factors that make it a worthy candidate on any stock trader's list of potential candidates. Now, trading in a pullback, may offer a low-risk entry into a confirmed bullish trend in the stock's price action.
Graphic provided by:
Amgen (AMGN) is one of the leaders within this group. It has an $80 billion market cap and over $17 billion in revenue with a 26.33% profit margin. It also has over $21 billion in cash on its books with an impressive return-on-equity of 23.95% and operating margin of 34.08% in addition to year-over-year quarterly earnings growth of 21%.

While those key statistics are impressive and in-line with what you want to see with a potential trade candidate, AMGN does have some potholes on its financial sheet.

While it is fundamentally sound and has a steady stream of revenue from its sales and patents, the company also has almost $24 billion in debt and shares outstanding of 750 million.

Figure 3. ALXN is a smaller competitor to AMGN but has recently signalled an early long entry when it traded higher on larger trade volume in the last 10-day's worth of trading. This signal could get you in early in a stock that is a very strong Industry group with lots of upside potential.
Graphic provided by:
But, there are a couple of key factors to consider when taking these negatives into account. First, with $21 billion in cash in the bank account and annual revenues of $17 billion, AMGN could pay off its debts in just under five or six weeks if needed, so debt management is no problem. The number of shares outstanding is definitely higher than what most momentum traders would like to see but this bull market is favoring large-cap stocks over mid- or small-cap stocks at this point in time. Most mature large-cap companies will have more shares being traded due to its investor following so it doesn't pay to ignore the price action just because the number of shares fall outside the model for stock selection. The market has made its choice in favoring large-caps like AMGN and it doesn't pay to fight it but to follow it like any good technical trader.

AMGN, along with the rest of the biotechnology group, is the market's best kept secret right now and appears to offer the kind of forward-looking growth that traders and investors love so it's worth following and taking advantage of when the time is right. Wait for a pullback to take a position and ride the momentum upward as the trend is likely to resume its course.

Who knows? In six months time, more or less, you could be riding the stock for huge gains when the rest of the investment community finally notices that biotechnology is where the performance is and begins touting it all over the news. By then, if you're still in, that will be the time to think about locking in gains and exiting your position altogether.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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