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The Next Bubble-
Bio Tech |
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I believe markets move from one bubble
to the next. The duration of a correction relates to how big the previous
bubble got. Unless you were in energy stocks in 2005, you probably did
poorly in the market. 2005 was a big commodity bubble, and those are the
worst bubbles for the overall market. When oil and other commodity prices
rise, it hurts all other industries with no corresponding benefit. If you
have a semi conductor bubble, it doesn't hurt health care stocks. A biotech
bubble doesn't hurt computer manufacturers. However, high oil prices hurt
everything but energy companies.
I have written about this in the
past and I still believe it to be true: We are in a transition phase to
the next big bubble, and it could well be biotech. My reasons are pretty
simple. Big Pharma drives biotech. The big pharmaceutical companies have
a number of major problems to overcome these days. Many of their big revenue
producing drugs are coming off patent. Their pipelines are relatively empty
of replacement drugs. They all seem to have some kind of major litigation
problem.
However- there is one thing they
all have in ship loads: cash. They have tons of cash for the right products.
Demographics are fueling demand for
new drug therapies. 7,000 baby boomers turn 60 everyday. When increasing
demand meets diminishing supply, someone steps in to fill the void.
Big Pharma likes to find smaller
companies with big potential new revenue producing drugs and acquire them
when they are one year to eighteen months from an FDA Approval. Hence,
the resurgence you see in the BTK- or Biotech index I have pictured here.
This is a monthly chart measuring the BTK back to its March of 2000 fully
inflated bubble high.
As you can see, we are approaching
those same highs six years later.
I'm looking at lots of small biotech
companies right now. I like companies with big potential revenue drugs
in their pipelines- Stem Cell related technologies are going to be much
bigger than they are right now. I still love the Diabetes theme. It is
currently forecast 1 of every 3 adolescents will be obese and contract
Type II Diabetes. Cancer is huge as well. And- whatever happened to AIDS?
I am looking at a fallen angel in the AIDS world.
And, speaking of Diabetes, it looks
like OTC Journal subscribers should be getting close to ringing
the bell on Dexcom:
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Dexcom
(NASDAQ: DXCM): Price Action Suggests FDA Approval Imminent |
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The action in DXCM this week
tells me the FDA Approval is imminent. DXCM was featured in the
January
28th edition at $16. Thursday, the stock made a new all time
high on fairly robust volume, and traded nearly to $21.
Dexcom has developed a remote
implantable sensing device to measure blood glucose levels for diabetics.You
can get a live feed of your blood chemistry from a hand held wireless device
about the size of a smart phone. MedTronic (NYSE: MDT) has a recent
FDA Approval on a similar device, but purportedly is not nearly as elegant,
user friendly, or accurate. MDT's device represents a very small
percentage of the company. DXCM's device is everything to DXCM.
A number of highly respected research
analysts: Thomas Gunderson at Piper Jaffrey for one, have predicted the
company would receive an FDA Approval for a 3 day version of the device
sometime around the end of Q1- guess what, last time I looked at my calendar,
we are nearing the end of March.
As you can see from the chart, the
stock has traded up very nicely this year, kicking off '06 at about $15
and making a new all time high on Thursday.
Clearly, the stock is telling us
the market believes the FDA Approval is near at hand. In fact, it is my
guess that today's pullback into the low $19 area might be the last chance
to get in before the approval is announced.
My expectation: the company will
announce the FDA Approval pre market someday in the not too distant future.
The stock will gap up that morning, trade at a new all time high for 15
to 30 minutes, then start coming down rapidly. I have seen this scenario
play out a million times when expectations are "pre priced" into a stock.
Since I believe the approval could
come any day, I am now planning my exit strategy. I am setting my alarm
every morning to make sure I am up checking the news feeds at least 30
minutes prior to the open. I believe there will be a brief window in time
to maximize my profits.
The chart I have prepared shows Fibonacci
expansion analysis. This is a fancy term to suggest that the next move
up will be roughly equivalent to previous moves up.
Level I is the first profit objective,
known as the COP of "Contracted Profit Objective". This is a sort of worst
case scenario. $21.42 is the number. If the stock trades there early,
I will sell.
Level II is the second profit objective,
known as the XOP or "Expanded Profit Objective". The number here is $24.60.
If the stock trades to this level, it would be a best case scenario.
In either case, these objectives
are based on the FDA Approval being announced. If they don't get the approval,
the stock will probably be cut in half before anyone can do anything.
The morning it happens I will definitely
sell all of the 7,000 shares I have accumulated at an average cost of $14.71.
I will also try to get a locate and short the stock only for a quick trade.
There won't be a newsletter published
on the event- in any case it would get to you too late. Check the BLOG,
but I may be too busy trading to post one.
Please put any current comments or
questions on the most current BLOG for Dexcom. Keeping my
fingers, toes, and hair (what little I have left) crossed for a positive
conclusion to what so far has been a great idea.
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