Most growth stocks have taken it on the chin of late. But Ultragenyx stock has bucked the trend.
The big story of this week has been that of rotation, with the positive vaccine news on Monday morning leading to a whoosh out of leading growth stocks and into lagging cyclical plays. Basically, the worst stocks (both fundamentally and technically) have done the best, while those that have been in favor have mostly been hit hard. Ultragenyx stock has been a rare exception. More on that in a minute.
But first, I figured I’d start with some good news first involving the overall market. It turns out there have been two recent “signals” that portend nicely higher prices going forward.
One occurred last week. Not only did the major indexes score big gains, but the S&P 500 did something that’s very rare—it rose at least 1.5% on three straight trading days (last Tuesday, Wednesday and Thursday). Since 1970, that’s only occurred nine other times. And as with most shows of unusual strength, it usually leads to great things.
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Specifically, within three months following these strong three-day rallies, the S&P has rallied a maximum of 7%; within six months, the index has chalked up an average maximum gain of nearly 14%; and over the next year, the average max. gain is north of 22%. Said another way, three straight days of gains that big has a history of representing a solid kickoff to future gains.
To be fair, the signal does have one drawback: About half the time, the market suffered a good-sized correction soon after the signal (if it occurred near a bear market bottom, a retest wasn’t unusual). Indeed, in four of the nine cases, the S&P fell 7% to 14% from the signal before finally tacking on solid gains. The other five were mostly up and away.
The second positive factor comes from seasonality, and it’s something I wrote about in my Cabot Growth Investor advisory last week. As many of you know, the market tends to have a “best six months” (November through April) that over decades has produced most of the overall gains, while the “worst six months” (May through October) have historically produced little to brag about.
However, it turns out when the market stages a solid gain in the “worst-six-month” period, it almost always portends further good things for the ensuing “best-six-month” period. And that has occurred this year: 2020 saw the Dow up more than 8% during the May-October time frame for just the 12th time since 1950. On average, those 12 times saw the Dow rise as much as another 14% during the next six months!
None of this means it’s up and away from here. But it’s confirmation of many other pieces of longer-term evidence I see that this is a bull market and the next major move is likely to be up.
3 Growth Stocks Bucking the Retreat
Now, homing in on this week’s action, it’s been crazy, with an everyone-out-the-door move from growth stocks after the Pfizer (PFE) vaccine news Monday morning. The question is whether this will be yet another short-term (few trading days) selloff or the start of a sustained rotation into “value” stocks, which today are basically any company whose fortunes are tied to the economic recovery.
In reality, there’s no way of knowing that answer ahead of time, and the best way of figuring it out is simply to watch the action of growth stocks every day. The more names you see break key support or flash obviously abnormal action, the greater the chance that growth stocks are in the penalty box for a while.
One thing I like to keep an eye on is recent breakouts to see how they fare. For instance, take a look at Axon Enterprise (AAXN), which gapped to new highs on earnings last week; Zendesk (ZEN), which exploded to new highs after its October pullback to the 50-day line; and Farfetch (FTCH), which went vertical last week after inking a deal with Alibaba and reported earnings yesterday. If you start seeing two or all three of these really give up the ghost (AAXN below 105, ZEN below 107, FTCH back to its breakout level of 32) it would tell you this likely isn’t just a few-day event.
Ultragenyx Stock: November’s Biggest Winner
We’ll see how it goes, but in the meantime, I’m keeping my eyes open for areas that have a growth story that are acting well. Right now, I’m seeing a decent amount of those in biotech, and one of the stronger names in that area is Ultragenyx (RARE) stock, which actually appeared in my Cabot Top Ten Trader advisory two weeks ago. Here’s what we wrote in that issue:
“The market for rare diseases is underserved, with diagnoses of rarely seen medical conditions taking up to 10 years while available treatments often don’t exist. Ultragenyx is focused on filling this void by developing products for treating ultra-rare, debilitating genetic diseases. The company has a diverse drug candidate portfolio that addresses diseases where the unmet medical need is high and biology for treatment is clear. Its recent successes include Mepsevii, which was approved in 2017 for the treatment of an inherited condition known as Sly syndrome. Then there’s the firm’s Crysvita therapy for treating patients with tumor-induced osteomalacia (TIO), which causes weakened and softened bones; that was approved by the FDA in June. And there’s also Dojolvi, which treats adult patients with long-chain fatty acid oxidation disorder. In terms of the pipeline, Ultragenyx has two gene therapy candidates in Phase 2 trials (expectations are that Phase 3 will soon begin), including DTX301 (for treating ornithine transcarbamylase (OTC) deficiency) and DTX401 (a potential treatment for Glycogen Storage Disease Type 1a (GSDIa). On the financial front, Ultragenyx is storming out of the development stage—in Q3, revenues leapt 216%, while total revenue for the first nine months of 2020 was $180 million (up 163%). Analysts foresee continued revenue increases of between 90% and 100% in the coming two quarters as Ultragenyx remains active (including its recent collaboration with Solid Biosciences to develop and commercialize new gene therapies for Duchenne muscular dystrophy). For next year as a whole, Wall Street sees the top line expanding 33% next year as a whole, which could prove conservative. Encouragingly, an Ultragenyx stock share offering last week was gobbled up with no trouble despite the market’s plunge. Overall, it’s a compelling story.”
As for Ultragenyx stock, it had a nice recovery from the March market crash, and after a three-month rest, has lifted out of a multi-year base on solid trading volume. Biotech stocks are always somewhat risky, but RARE looks like it’s early in a new run.
If you want to know what other stocks I’m recommending in Cabot Top Ten Trader, which every Monday identifies the 10 strongest growth stocks on the market, click here.