Monday, June 24, 2013

PBYI: Turbocharged

Update 7/30/2013: PBYI fell below its 10-day price channel on July29 and I closed the position the next trading day for an 18.6% gain over 36 days. The yield works out to 188.4% annualized. The position was structured as long shares and so lacked leverage.

Puma Biotechnology Inc. (PBYI) broke above its 20-day price channel on Friday and confirmed the bull signal today amid a market that seemingly sees running with the bears to be the better course.

The breakout came one day before an Puma Biotech news release announcing that the company had been added to the Russell 3000 index.

Russell Investments on Friday included PBYI on list of additions to the Russell 3000 index. Inclusion on an index acts like a turbocharger to the upside, and traders account for that when a company is added. PBYI closed on Friday 10.6% above the day's open, hitting an all-time high and today pushed up to a new one, $43.50.

PBYI is a fairly new stock. It began trading publicly in April 2012 at $10 and so has fewer than five quarters of history. The lock-up period imposed as a condition of the initial public offering expired April 17, and so the stock is now freely traded.

It has been in an uptrend since July 2012. The present breakout to the upside is the third since that trend began.

The completed bull signals had split results. The successful trade yielded 40% over 71 days in a rise from $11 punctuated by three corrections on the weekly chart. The failed trade produced a 66% loss over 12 days. The win/lose yield spread is high, at 33%.

PBYI was one of two symbols to survive my initial screening over the weekend. (See "Monday's Prospects" for details.) The other was  bear signal, ODP, which has a low win/lose yield spread, and also is priced at under $4, making it difficult to construct a short position with options.

So PBYI came out on top. Yet, there are three reasons to hate the idea of playing this stock now:

1) The rise came on news. I'm averse to playing news breakouts -- like Nathan Rothschild, I want to buy on the cannons and sell on the trumpets. On the other hand, inclusion in a major index does give a continuing upside boost, so perhaps entering after the rise can be seen as jumping aboard a symbol that just acquired a turbobooster.

2) Puma Biotech is a pharmaceutical development company, which means its success and failure are largely in the hands of regulators at the U.S. Food and Drug Administration. Bureaucrats defy efforts to chart them. They have no bull or bear trends. They are, by definition, walking black swan events.

3) PBYI's upside breakout is coming amidst a market that is in a mini-panic to the downside. It may be short lived -- or not, I can't predict the future -- but my trading bias generally follows the market. If the market has a bearish bias, then I do to. Arguing for a bull play in PBYI is it's correlaton to the S&P 500, which is quite low, at .20 (where 1 is perfectly correlated, -1 is perfectly inverse and 0 is no correlation).

The strength of the bearish bias noted in item 3 can be seen in my bullish holdings opened before the downtrend began. I have five bull positions left. MPEL gave an exit signal on Friday, and both QIHU and SBUX did so today. It is a sad and lonely time to be a bull.

(The three giving exit signals are structured as short vertical options spreads and so I'll be getting out in a tactical fashion. See my post "How I exit hedged positions". The remaining two, CLB and SEP, are long shares and haven't given an exit signal.)

Puma Biotech, headquartered in Los Angeles, California, focuses its efforts on treatments for breast-cancer patients. And that's a far as any explanation I can give goes, except to say that successful treatments for breast cancer represent a particularly lucrative market for a successful developer.

The company is covered by slightly more than a handful of analysts, who combined give in a 71% enthusiasm index, which is higher than most companies I've analyzed.

Like all development-stage drug companies, Puma Biotech's stock is fueled by hopes and dreams rather than the financials. The company reports return on equity of negative 100% (!), but, to the upside, no long-term debt.

It has never earned a profit in the five quarters since it went public, but losses have been lessening for the past two quarters compared tot he all-time nadir in the 3rd quarter of 2012. The most recent quarter produced the first upside earnings surprise, following four surprises to the downside.

Institutions own 78% of shares.

PBYI on average trades 141,000 shares a day. It has no options. Any bull position must be structured as long shares, which forecloses both leverage and hedging.

The fair-price zone on today's 30-minute chart runs from $41.86 to $42.87, encompassing 68.2% of transactions surrounding the most-traded price, $42.56. The stock opened near the lower boundary of the zone, rose beyond the upper, fell back to the floor and is now trading just below the most-traded price.

Puma Biotech next publishes earnings on Aug. 15.

Decision for my account: I've opened a bull position in PBYI, structuring it as long shares. Despite the three reasons to dislike the trade, it is unleveraged, which reduces the likely loss. Also, it is a very small position under my trading rules because of its high average daily trading range, which now stands at 1.69. Finally, it is poorly correlated with the S&P 500, which suggests that it is less likely to follow the lemmings off of the cliff.

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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.

No comments:

Post a Comment