This Stock Might Be Ahead of the Fundamentals
Seattle Genetics, Inc. (NASDAQ: SGEN) is a biotechnology company focused on the development and commercialization of therapies for the treatment of cancer. The company is engaged in the development and sale of pharmaceutical products on its own behalf or in collaboration with others.
The Company’s marketed product ADCETRIS, or brentuximab vedotin, is an antibody-drug conjugate (ADC). In addition to ADCETRIS, the Company’s pipeline includes other clinical-stage ADC programs, such as ASG-22ME, SGN-LIV1A, SGN-CD19A, SGN-CD19B, SGN-CD123A, SGN-352A, and ASG-15ME.
Efforts also include two immuno-oncology agents, SEA-CD40, which is based on its sugar-engineered antibody (SEA) technology, and SGN-2FF, which is a small molecule. It also has multiple preclinical and research-stage programs that employ its technologies, including SGN-CD48A and a preclinical ADC.
ADCETRIS is an ADC comprising an anti-CD30 monoclonal antibody attached by a protease-cleavable linker to a microtubule disrupting agent.
Sales over the past twelve months topped $600 million and are up more than 500% since 2011. However, the company has not recorded a profit. Analysts expect the company to report its first profit in 2020.
Despite the lack of earnings, the stock gained more than 450% since 2011. However, recent news could spell trouble for the stock.
Seattle Genetics came out with a quarterly loss of $0.57 per share versus the Zacks Consensus Estimate of a loss of $0.39. This compares to loss of $0.41 per share a year ago. These figures are adjusted for non-recurring items.
The stock dropped sharply on the news.
This quarterly report represents an earnings surprise of -46.15%. A quarter ago, it was expected that this biotechnology company would post a loss of $0.27 per share when it actually produced a loss of $0.27, delivering no surprise.
Over the last four quarters, the company has surpassed consensus EPS estimates just once.
Seattle Genetics posted revenues of $174.51 million for the quarter ended December 2018, surpassing the Zacks Consensus Estimate by 5.26%.
This compares to year-ago revenues of $129.61 million. The company has topped consensus revenue estimates four times over the last four quarters.
Heading into the earnings news, Seattle Genetics shares have added about 33.6% since the beginning of the year versus the S&P 500’s gain of 9%.
The stock could be ahead of the company on both a short term and a long term basis at this point.
A Trading Strategy To Benefit From Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
A Bear Call Spread in SGEN
For SGEN, we could sell a March 15 $65 call for about $4 and buy a March 15 $70 call for about $1.75. This trade generates a credit of $2.25, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $225. The credit received when the trade is opened, $225 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $275. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($225).
This trade offers a potential return of about 80% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if SGEN is below $65 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $218 for this trade in SGEN.