Monday, February 6, 2012

IBB: Back to the Future III?

In my random selection of large-cap stocks to compare, fate for the first time has given me an exchange-traded fund to analyze -- a challenge because the information available for funds differs from individual companies, and I find ETFs to be much more difficult to evaluate.

iShares Nasdaq Biotechnology (IBB) mimics 125 biotechnology companies traded on the Nasdaq, most of them with small capitalizations. It carries a ratings of two stars out of a possible four from Morningstar.

IBB had the most bullish chart among 16 selected at random from 675 large-cap stocks. (See my essay "10,000 Charts" for an explanation of my screening techniques, including the random component.)

The chart has been in blue-sky territory since early January. It has been on the rise since its 2008 recession low. The most recent leg up began Aug. 9, 2011 at $84.01 and it hit a fresh high today of $121.82.

So for momentum traders, who like nothing better than to leap aboard a fast-moving train, IBB is a dream play.

Biotech always has a futuristic tinge, in my mind. These companies generally are doing cutting edge stuff that will provide incredible benefits to people in decades to come, and also incredible profits for successful meds.

But like all cutting edge enterprises, the risks are high. Failure can be spectacular. IBB may be a speeding train, but what lies ahead?

The fund carries a 0.48% annual fee -- on the low side as such things go. Its top holding is Amgen Inc. (AMGN), accounting for 8.25% of the fund, followed by Alexion Pharmaceuticals Inc. (ALXN) for 6.59% and Gilead Sciences Inc. (GILD) for 6.16%. The full top holdings list is part of the iShares fund profile.

AMGN has a debt/equity ratio of 17%, ALXN of 16% and GILD of 44% -- all in growth-stock territory. Debt to equity is all over the place.

IBB is moderately liquid, with average volume of 906,000 shares. But it has a full selection of options with tight bid/ask spreads and acceptable open interest, although the open interest is a bit lower than I like.

Implied volatility is quite low, at 21%, and has been declining in its most recent leg down since last November. However, it has risen since bottoming at 16% on Jan. 12. So the question is, how low can it go. Don't know.

Decision for my account: It's a sweet but I'm passing it. I'm having a hard  time constructing an options positions that works for me in light of the low implied volatility. The chart looks like a speeding train, but the implied volatility looks like the train is about to run off an incomplete bridge into a canyon (with a tip of the hat to "Back to the Future III"). Also, why play the fund when I can play some of its top holdings, with greater volatility?

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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