Is it Time for a Summer Haircut?

Sell in May and go away. We have all heard this trite market cliché and it gets especially popular this time of year.

This is the last week of May and the market sure looked like it was following along with the axiom yesterday. The question is what to do to make sure you do not get caught with your pants down on a big winner and take some gains when you can. The sell time is a quintessential decision for the satellite stocks in your core-satellite portfolio.

Ironically, as we mentioned in yesterday’s Goldman Guide, corporate buy backs are all the rage right now. We hypothesized that this has had somewhat of a counter-productive effect on stock prices. On a side note related to this point, the chart below illustrates the corporate stock buy backs over the last ten years. It’s funny how the strategy here seems to be sitting on the sidelines when the stock is low and buy high!

10 Year U.S. Stock Repurchases

(Source: http://www.factset.com/)

We have mentioned a few times over the last few weeks that the momentum in small cap biotech is definitely slowing down. We took a look at some of our Market Monitor highlights from 2015 in search of a candidate for profit taking.

Lion Biotechnologies, Inc. (NASDAQ - $10.43) was featured back on January 30^th at a price of $7.97. The stock is up close to 31% since then. We made the call for $11 by the end of 2Q15. We are almost there!

For a refresher, the Company is a development stage biotechnology firm that develops T-cells and engineered T-cells for the treatment of various cancers. The Company’s lead product candidate includes a ready-to-infuse autologous T-cell therapy using tumor-infiltrating lymphocytes (TILs) for the treatment of patients with stage IV metastatic melanoma. It has a patent license agreement with the National Institutes of Health to develop and manufacture certain proprietary autologous TILs adoptive cell therapy products for the treatment of metastatic melanoma, ovarian cancer, breast cancer, and colorectal cancer.

One of our strong ‘likes’ for LBIO was the technical analysis. Most of these indicators have turned bearish including the two major metrics we look at, EMA and the Relative Strength Index. Additionally, on the tech side, the short float has jumped to close to 5%. Finally, the stock reached the $14.49 in early March and has had steady down side momentum since then, on high volume with over 600,000 traded per day since then on average.

We think that LBIO could still be a great long term play as the Company now has $44 million in cash with no debt as of December 31, 2014. The question is how to lock in some gains. There are still puts that can be bought for June and July at $10 strike which could be used for a protective put strategy. Additionally, a call with a $12.50 strike expires in September if covered call is more your ‘thing’. At a minimum taking some off the top could be in order.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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