Wednesday, June 6, 2012

SGEN: Biotech development

Seattle Genetics Inc. (SGEN) is a biotech company develops cancer-fighting antibodies cloned from a single parent cell. That means that they are very specific in their application. The terms of art are "monoclonal antibodies" what what Bothell, Washington company makes, and "monospecific" for where they're targeted.

My usual pools of stocks to analyze have turned brackish, so today I'm following in the footsteps of Jim Cramer, who highlighted SGEN on Tuesday's Executive Decision segment. (The SGEN discussion is on the third screen.) I haven't read or watched Cramer's analysis, so my opinion is independent of his.

SGEN has been trending higher through a series of wide, high-velocity scribbles since its recession low. The chart looks as though it had been drawn by a mad child with crayons.

The most recent leg up, if indeed "leg" is an appropriate term for this chart, began near the end of 2011 from $15.48 and on May 16 hit a swing peak of $21.99, which it immediately retraced down to near the day's low.

A chart like this tells me that there is a lot of speculative play in SGEN. It is a bullish chart, but one only for the well hedged of strategy and courageous of heart.

The price has shot up the last three days, from $19.27 on Monday up to today's high (so far) of $21.59.

Seattle Genetics has a negative return on equity. The shareholder equity itself is positive, but the company has recorded losses for 11 of the past 12 quarters. The last profit was in 2010.

But it's a speculative company. It's trying to hit it big in a sector that often resembles a crapshoot. The payday comes once the drug is developed, approved and hits the market. The company has no long-term debt, a big plus once the research pays off.

Institutions own nearly all of the shares, and the price has been bid up to an extraordinary level. It takes $18.66 in shares to control a dollar in sales. (Which probably says more about sales that about shares.)

I'll pause at this point to do a compare and contrast between Cramer's approach and mine. 

Cramer, first and foremost, is a business analyst. By that I mean he looks at the company's financial results and chart within the broader context of a sector and management decision-making. Most of his analysis seems to me to be about how the business is run.

I admire that approach. It takes decades of hard-won knowledge to be able to pull it off as skillfully as Cramer does. 

Like most private traders, -- true confession! -- I lack that level of skill. What I do is read the chart, read the financials, read the business description, and come to a decision about whether to buy. 

Where my approach is rapid, Cramer's is deep.

Back to SGEN. The stock trades on average 1.1 million shares a day. That supports only a small selection of option strike prices. Open interest is low, although the bid/ask spread is fairly reasonable.

Implied volatility is at 57%, near the six-month low. It has been falling steeply since late May.

Options traders are pricing in a 62.8% chance that the stock will close between $17.96 and $25 a month from now, for a maximum 16% gain or loss.

Although volatility is low relative to past levels, it is high compared to many other stocks.

Options volume is about 18% above its five-day average, yet another indicator of speculative interest. Call option volume is about two and half times put option volume.

Seattle Genetics next publishes earnings on Aug. 8.

Decision for my account: I won't be trading SGEN. I like the chart and am not overly troubled by the financials, especially with zero debt. However, biotech development companies are very speculative, and the lack of option liquidity means I would be unable to use hedging strategies to guard against catastrophic events, such as a contrary FDA ruling. If the option open interest were higher, then I would consider opening a bull position.


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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