Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Seven Financial Indicators of Highly Successful Biotech Stocks Investing

Companies / BioTech Feb 21, 2015 - 10:41 AM GMT

By: Money_Morning

Companies

Ernie Tremblay writes: When evaluating biotech stocks, many key indicators that work for other industries – e.g. price-to-earnings ratio, profit margin, revenue-per-share – often don't apply.

Here's why they don't, and why seven of these critical financial indicators do…


The Usual Ratios Don't Apply

The reason is pretty straightforward: many low- and mid-cap biotechs haven't yet made a profit, and probably won't for years to come.

Unlike big pharmaceutical companies, these smaller startups focus their time, money, and effort on research and development, rather than marketing new products.

In fact, many of them don't maintain a sales force and have no intention of building one. Instead, they rely on business partnerships with companies that do concentrate on selling products to get their medications into the hands of doctors and hospitals.

For income, they rely on royalties, milestone payments, and public offerings of common stock.

Even those firms that do market their own products can go many years before seeing their first experimental drug approved, so thinking of valuation and potential in terms of profits won't take you very far.

Generally speaking, when assessing a biotech, the first thing an investor should look at is the company's drug pipeline. What great new medications is it developing to fill serious medical needs?

After that, however, there are some technical financial indicators – seven to be exact – that will prove very helpful in sizing up a stock before you buy it.

The Key Indicators

1) Burn Rate

This refers to the rate at which a company spends money versus its income. Ideally, you'd like a company to have enough cash on hand to operate for the next 13 to 18 months without having to raise money through a dilutive public offering.

The calculation is simple:

Burn rate = Capital expenditures + Negative cash flow from operating activities

You can retrieve these numbers from Yahoo Finance for any publicly traded stock. To get a more accurate picture of the financial road ahead, find these numbers for the most recent quarter and then divide the answer by three to estimate burn per month.

Next, calculate how much money the company has in its coffers:

Cash on hand = Cash and cash equivalents + Short-term investments

Finally, calculate the amount of time, in months, the company can continue to operate with current available funds:

Operation coverage = Available funds/monthly cash burn rate

2) Convertible Debt

Startup companies often use convertible debt to finance their operations. This simply means that the company borrows money from a lender and issues warrants to cover the debt. A warrant is a promise (bond) that gives the lender the right to purchase stock, often at a highly discounted, predetermined rate (strike price), in the future.

Using convertible debt is a perfectly legitimate way for a robust, larger, profitable company to raise financing, but for a fragile, small-cap, pre-profit biotech, not so much.

The problem is that lenders can – and often will – borrow shares and sell them short when a catalyst, such as an FDA approval, is driving share price rapidly upward, then cover (repurchase the shares) at a dirt cheap price by exercising their warrants. This is called convertible arbitrage.

If they do this with a sizable block of shares, the transactions can force the stock price to reverse direction, that is, sink when it should be rising.

To make matters worse, shares the lender purchases through warrants must be newly issued by the biotech, which has a dilutive effect, driving price down even more.

So your best bet is to look for biotechs with low or no warrants outstanding. This information isn't always obvious when looking over a balance sheet, but you can find it in their most recent 10-Q SEC filing, generally available on the company's website. Open the document and do a search on "contingent warrant liabilities."

3) Market Cap

Market capitalization is the total sum value of a company's outstanding shares, based on current price-per-share (PPS). This number can give you a couple of valuable hints about the attractiveness of a particular stock.

If the cap is very small, below about $250 million, the PPS can be extremely volatile on very low trading volume, so liquidity may be a problem-you can find yourself needing to sell with no one there to buy.

At the other extreme, if the cap is over $5 billion, the company may have reached the limits of its growth, unless it's developing a broad spectrum product portfolio that could help it become a full-fledged pharmaceutical company.

4) Volume/Average Volume

Like market cap, these numbers can help you decide if shares are liquid enough to allow you a quick exit, should you need to make one. Stocks that trade on average about 350,000 shares per day are a good bet. Fewer than 300,000 is getting into dicey territory. Under 200,000 is the Wild West.

You can also use volume to gauge investor sentiment – an important factor when trading stocks in an industry as volatile as biotech. A PPS downturn in lower than average volume probably indicates the stock's movement has little importance and does not indicate a trend.

The same price movement in high volume, however, can mean that institutions are bailing out, so it may be time to take the hint and follow their lead. The same principles apply to upward stock movement.

5) Beta

This measurement expresses how volatile a given stock is likely to be in comparison with the market, based on past performance. A Beta of 1 means equivalence with market volatility, while a number greater than 1 (e.g. 1.2, etc.) indicates higher volatility and less than 1 (e.g. 0.8, etc.) points to lower.

This number can give you some perspective on days when the stock market seems calm but one of your positions is jumping higher or lower for no apparent reason.

It can also help you buy stocks that fit your trading style. If you're a day trader, for example, you may want to get into stocks that can move significantly within a single session. Longer-term traders, however, might find stocks that move more gradually, along with the market, more attractive.

6) Short Interest

Short selling, as you probably know, is an investment tactic that can make money for a trader when a stock's value decreases. A short seller borrows shares from another shareholder, sells them, and then buys them back when the price goes lower, pocketing the difference.

An increase in short interest (expressed as short percentage of the float) can indicate a trend in market sentiment away from the stock, while a decrease in short interest can mean more confidence in the company's prospects.

If that were all there was to the story, short interest might be just an interesting risk indicator of where other investors feel the stock is going to go.

Unfortunately, the story doesn't stop there – the plot grows more sinister.

Because biotech stocks tend to be relatively inexpensive and trade in fairly low volume – especially in after-hours trading – they're vulnerable to price manipulation. And it happens.

It doesn't take much for a few hedge funds to sell large blocks of shares short, driving down price and creating negative momentum that scares longs into selling as well. At the same time, it's not uncommon to see anonymous campaigns to devalue a stock by disseminating false or misleading information about the issuing company through blogs, articles, and message boards.

This can happen even in the face of a strong positive catalyst, such as an FDA approval.

So a large percentage of short interest can indicate that fund managers are getting ready to force a particular company's PPS down, even if it has developed good new medications for sick and dying patients, all in the interest of short-term profits.

The question, then, is what represents a "large" percentage?

Although there are other factors to consider, in general, look for stocks with a short interest of less than 20%.

7) Bollinger Bands

Bollinger bands are a volatility indicator that can graphically show you a stock's standard deviations from a simple moving average over time. Go to the stock's Yahoo Finance page, bring up its chart, click on the Indicator button, and click Bollinger Bands in the dropdown menu.

This will bring up an upper and lower line that describe the stock's high and low volatility range. If the stock price touches or crosses either line more than once in a short period of time, it may be time to trade.

Touching the upper line repeatedly indicates the stock is probably overbought and may be headed downward soon – time to sell.

Touching the lower line repeatedly tells you the stock is oversold and should head upward – time to buy.

If a stock crosses over one of the lines and remains there for a few days, it's mostly likely consolidating at new high or low level.

A Final Word

None of these indicators will yield, by itself, a thumbs up or down for any given biotech stock.

Taken together, along with a deep understanding of a company's pipeline, they can be extremely helpful in maximizing your profits and minimizing your risk.

Source :http://moneymorning.com/2015/02/20/the-seven-financial-indicators-of-highly-successful-biotech-investors/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules