Today’s mixed market is giving us an opportunity to lock in profits in one Breakout name that has given us a quick one-month return and roll those gains into a small biotech that is ready to rebound.
Photronics (PLAB) has been a consistent winner for us in Breakout, making money for us last year and presenting another shot at profits last month. When I recommended it in mid-October, the stock was infested with opportunistic short sellers who managed to obscure the way Wall Street was actually guiding earnings expectations upward.
Since then, the market has come roaring back and the shorts have scattered. After quickly passing our $8.75 target in just a few weeks, shares have struggled to stay above $9. Today’s action tells me that the stock is getting a little tired, so it’s time to pocket our quick gains and sell PLAB.
New Growth Buy: CTIC
I see a great new opportunity to put those profits back to work in CTI BioPharma (CTIC). The company’s latest quarterly numbers confirmed that this cancer drug developer is gaining market traction in Europe with its first commercial product, a last-ditch treatment for aggressive forms of non-Hodgkin’s lymphoma. While it’s still early, management seems confident that even their limited marketing reach will turn this particular franchise into a profit center in the coming year.
If so, CTIC may be on the brink of resolving the biggest overhang on any start-up biotech company’s future — the struggle to generate sustainable operating income before the venture funding runs out. While the company burned $3 million of its cash last quarter, it still has about $30 million left on the books, so fears that it will go under before fulfilling its commercial promise are unlikely to come true in the very short term.
Management is still looking at a net loss of around $70 million for 2014 as a whole, but the year is almost over and most of that spend is already old news. Few on Wall Street expect the burn to get above $26 million a quarter for the remainder of CTIC’s lifetime, so adding a profitable product — even one that currently delivers around $4 million per quarter in sales — to the calculations should make a difference when it comes to getting the operation over the hump.
The coming year should give traders plenty of compelling news to work with. The next quarterly results will establish the sales trend, giving analysts what they need to start evaluating how fast the company’s lymphoma franchise will grow and how big it can get.
Plus, a second program has already wound up in the clinic and CTIC expects to report results in the first quarter. This one is for a rare form of bone marrow cancer that currently resists all treatment but high-risk stem cell therapies. The FDA has already put the program on a fast review track, so a final decision should come down no later than six months after final data submission.
With so much upside potential on the horizon, management decided to go back to the well and raise cash for what might be the last time. As a result, shares have sunk 15% since the company’s earnings conference call in late October. While this secondary offering will dilute the existing float by around 10%, the cash will ease CTIC’s transition in the near term from a pure research and development company to a global sales organization. Investors who buy into the offering only have an incentive to convert as long as CTIC remains above $2. Their investment in the near-term development upside provides support for the rest of us.
Current prices around $2.15 indicate we’re near a floor, and the chart seems to be holding onto support here as I see signs of a lift now that traders are recognizing that the recent dip was overdone. Given the real progress this company has made and the prospects for truly transformational news ahead, I anticipate a rebound to $2.50. Buy CTIC below $2.20. Biotechs do carry an added element of risk, so please consider your risk tolerance before buying. And as always, be aware that low-priced stocks can spike quickly. I recommend that you build your position slowly and over time, while staying disciplined with the buy limit.