Making the Grade

Most Overvalued Biotech Stocks in 2019

There are few sectors more exciting than biotech.

The companies within it are pioneering breakthroughs and innovations. But that’s not all.

Because these trailblazers are potentially revolutionizing new treatments or curing diseases, their shares are extremely volatile.

They can skyrocket on promising data and deals…

And tumble back to Earth just as quickly on bad results.

That’s why, today, we’re looking at overbought biotech stocks that may be flying too close to the sun.

Investors don’t need to dig deep to find evidence of this.

Just look at the recent rise and fall of NextCure (Nasdaq: NXTC)…

Chart - NextCure One-Month

Shares blasted off a staggering 248.9%!

That was just a one-day gain! Investors nearly tripled their fortune in a single day.

But – as biotechs are known to do – it was all washed away.

NextCure shares imploded, losing more than half their value in a single trading session only a few days later.

But there were some warnings…

So with this Icarus-like scenario fresh in our minds, let’s dig into overvalued biotech stocks based on their relative strength index (RSI).

This is an indicator we’ve used plenty here in the past. And just as a reminder, a reading below 30 is “oversold,” meaning shares may be poised to pop. Whereas a reading above 70 is “overbought,” meaning a pullback is likely.

Before NextCure’s shares dropped, its RSI topped 92.

Here are some biotech stocks that may be flying too close to the sun right now

Chart - Overbought Biotechs

First, let me point out one thing: Shares of all of these companies are trading at or near 52-week highs.

They’ve enjoyed profitable runs. And as shares have soared, investors have chased after them, pushing them higher and higher into the stratosphere.

That means a great company can have overinflated shares, creating a dangerous air pocket when the winds change.

Right off the bat, we see Constellation Pharmaceuticals (Nasdaq: CNST) has a blistering RSI reading of 90.43.

And it’s no wonder…

Shares set a new 52-week high on November 6 as they blasted off more than 200%. They eventually ended the day up a mere 95%.

And shares haven’t really slowed down since. But that RSI level is warning enough for investors to not chase the stock.

Next, BeiGene Ltd. (Nasdaq: BGNE) shares hit a new 52-week high on November 8.

Shares have been on a tear since Amgen (Nasdaq: AMGN) (No. 9 on our list) announced it was taking a 20.5% stake in the company for $2.7 billion at the end of October. This ignited a fantastic run, though shares are now above the $174.85 per share that Amgen paid.

Then we have Deciphera Pharmaceuticals (Nasdaq: DCPH) with an RSI of 84.74.

Shares have been flying higher since August when the company’s gastrointestinal stromal tumor treatment, ripretinib, showed exceptional data in a trial. The reward for investors early into the play was an 80% jump in a single day on the news.

For most of these biotechs with sky-high RSIs, the story could be repeated again and again.

Over the past month, shares of these blazing biotechs have gained a minimum of 10% and a maximum of 287.9%.

Now, investors may have missed the boat on these massive, potentially life-changing runs. But that’s OK… there will be other highfliers in the days ahead.

The important thing to remember is not to chase shares higher. Someone is always buying at the top, driven by the “fear of missing out.”

Unfortunately, that’s one of the most dangerous mistakes an investor can make.

And this is why a simple indicator, like RSI, is useful to have in your investing tool kit. It’s like an early warning system for those stocks flying too close to the sun.

Because no matter how great a company might actually be, your fellow investors may have propped it up with wax wings.

Here’s to high returns,

Matthew