Finally, investors should pay close attention to the insider buying activity of CEOs and chief financial officers of biotech companies.
This strategy underperformed during the last three years but had consistently succeeded in the previous two decades. The strategy is simple: Monitor the insider buying activity on SEC Form 4 data, buy the stock upon announcement, set a small trailing stop and hold the stock for 30 days. Typically, the catalyst who justifies the executive purchase falls within a 30-day window.
Investors may also notice a few, small-time investors poking around the options chains shortly after these insider purchases.
The catalyst driving the purchase varies.
However, options investors can look to Market Chameleon, an online screening platform that maintains a database of market catalysts for the universe of biotech stocks. The platform includes dates associated with drug trials, executive presentations at conferences and Food and Drug Administration decisions.
In addition, the screen tracks options pricing and activity of call and puts options for the strike date nearest to the expected catalyst date.
Of course, the catalyst itself might not be a publicly-known event.
In April, the CEO of Oric Pharmaceuticals (ORIC) purchased shares. A week later, the CFO purchased shares.
The following day, the company announced that it was abandoning trials around the drug treatment to which it anchored its initial public offering hopes. The catalyst unlocked cash flow and allowed the company to focus on two other projects. The markets liked the news, and shares of ORIC increased to a near-term high of $7.07.
While ORIC has since pulled back, that short-term pop offered a 40% gain on the stock. Investors might consider buying the stock and setting a 7% trailing stop in any environment. This strategy has dramatically underperformed in the last three years, totaling -11.65% compared with the S&P 500’s 85.98% total return.
However, the performance of this strategy has nearly matched the total return of the S&P 500 over the last 10 years (338% to the S&P 500’s total 343%).
At the time of publication, insider biotech buying happened at several companies, including Scynexis (SCYX) and Greenwich LifeSciences (GLSI).
Tim Melvin, a 30-year veteran of financial markets, uses rigorous quantitative analysis based on the principles of deep value and private equity styles of investing of investing.
Garrett Baldwin is a momentum trader, economist, editor-at-large of Luckbox Magazine and the executive producer of Money Morning LIVE.