Maybe you are looking back at the 2020-2023 equity curve in your portfolio and are noticing an increasingly slowing upward trend. This is not your fault but rather the effects of the Federal Reserve (the Fed) raising interest rates, making ‘riskier’ high growth plays less attractive to the overall market. Now that the Federal Reserve potentially turns back to cutting interest rates this 2024, it is time to go ‘risk on.’
The world of biotech stocks often tends to offer the most upside potential at the trade-off of a market mentality and sentiment that accommodates the risk that comes from the process that typically makes these types of stocks successful.
Because they depend on the successful Food and Drug Administration (FDA) approval from products in their pipelines, these companies carry a lot of upside at a speculative pace, just what the market could soon be looking for as interest rates come back down.
Because of this trend and a specific announcement acting as the perfect catalyst, a company named bluebird Bio (NASDAQ: BLUE) is up by as much as 18% on Monday’s trading session. Before you go into the weeds of it, the one thing you should remember for this deal is that a 400% upside could only be the beginning.
Behind the scenes
Why would professional investors and traders even want to look inside the world of medical stocks? To sum it up, it is because the space is beginning to heat up. According to the latest employment situation report, the U.S. economy added 353,000 jobs in the past month, where 70,300 went to the healthcare space alone (nearly 20%).
Think about it: if you were – maybe you are – a hiring manager or business owner, the main reason you would go into a hiring spree is the expectation of busier times ahead, right? This is why Bluebird is about to get busy, really soon.
According to this press release from management, the first quarter of 2024 is expected to see the first patient trials in Bluebird’s LYFGENIA product pipeline after gaining FDA approval. This not only means better financial outlooks and valuations but also the power of Wall Street itself turning its attention to the stock.
Other stocks like Hims & Hers Health (NYSE: HIMS) have already seen the benefits of the heating momentum found in the sector, as that name has risen by 9.6% in the past week ahead of their earnings announcement, which will likely carry a few surprises for investors.
Understanding that the Health Care Select Sector SPDR Fund (NYSEARCA: XLV) has underperformed the broader S&P 500 index in the past twelve months by as much as 12% can also help you identify the gap that the sector needs to fill to catch up to the rest of the market in the coming months.
Why this stock?
Not only is Bluebird management now looking to apply accounts receivable accounting to their financial statements, but accounts to be driven by the deferred revenue from consumers upon the first set of patients starts in the first quarter of 2024 upon a successful phase three trial of their LYFGENIA line.
This bullish development for the company comes on top of a consensus price target of $6.7 a share, implying a massive upside of 400% from where the stock trades today. Still, analysts are not the only ones finding value to be had in this name today.
Investment houses like the Vanguard Group and The Goldman Sachs Group Inc. (NYSE: GS) have increased their already large stock stakes by 56% and 68%, respectively. Institutional backing is one thing; institutional backing in the middle of a potential short squeeze is another game entirely.
You can look at MarketBeat’s short interest scanner to find stocks with a large percentage of their floating shares held in short positions. Remember that closing a short position requires you to buy back the stock you borrowed at whatever the market price is.
In this way, as the stock goes aggressively higher on the announcements, price targets, and even institutional buying, these short sellers (who hold up to 25% of the float) will likely come to feel maximum pain and be forced to close their losing positions; which requires buying the stock and fueling and even bigger rally.
Bluebird is set to announce its following quarterly earnings results on February 29th. This date could potentially bring a good surprise for those watching this developing story closely. Will you let Goldman and Vanguard be the only ones to celebrate? Or will you consider joining them?
