As you can imagine, I keep a pretty close eye on the stocks that I recommend. So I knew that I had a good year in my biotech service at The Oxford Club. We took home a 419% gain in Celldex Therapeutics (Nasdaq: CLDX) and an amazing 775% gain on NPS Pharmaceuticals (Nasdaq: NPSP) calls. The average position returned 100.1%, with an average holding period of just four months.
But I was stunned when I was told that I had the best one-year track record in the history of The Oxford Club. After all, we have some pretty darn good stock pickers here.
Now, normally I don’t write about biotech stocks in Wealthy Retirement. They can be quite speculative. To make 100% gains in four months you have to be willing to accept some risk.
But investors who have some money to put to work in aggressive growth stocks should pay attention to what led to a record-breaking year.
Three Variables to Triple-Digit Gains
There are three key variables that I look at when deciding if lightning is about to strike a stock. And that’s after I’ve done the hard work of investigating the company’s products and pipeline, markets, and management, and talked with executives, scientists, fund managers and analysts.
After I’ve done all that, I need to see three variables in place to feel confident that a stock is the next Celldex or NPS Pharmaceuticals.
- A Catalytic Event: Something needs to spark the rally and an event like the release of clinical trial data, FDA approval, or an earnings release often does the trick. Before entering a position, I want to know when these events are likely to occur and I want a strong indication of which way they’re going to go.But just because a company has big news doesn’t mean the stock will automatically take off. Lightning doesn’t strike merely because of the presence of protons and electrons. Conditions have to be right. So along with the catalytic event, the stock needs two other variables…
- Unloved or Undercovered: If a company is followed by every analyst on Wall Street and those analysts expect a drug to get approved, when it does, what do you think will happen? Not much actually. Because most of Wall Street will already be in the stock and, in fact, the stock could very likely sell off on the news.But when big news happens to a stock that analysts don’t like or that no one is watching, that’s when things can really heat up. There will be more room on the bandwagon and as those people pile on, the stock will be driven higher.
- Building a Base: Stocks that haven’t moved much for the previous weeks or months are often better candidates to go higher and stay higher. If a stock has been climbing already, chances are there are a decent number of momentum players in the stock who will sell at the first sign of trouble.But a stock that has been flat for a while probably has a core of believers who are in it for the long term and will ride out the occasional bumps on the way to sharply higher prices.In technical terms, this is called “building a base.” And when a stock has that base, the rally that ensues is usually more sustainable.You can see here that before I got subscribers into Celldex, the stock had been meandering along for months, not doing much of anything, but shortly after, the stock took off.