A small biotech company, Dendreon (DNDN), made a big splash last week when it released positive data for its prostate cancer vaccine Provenge.
In a nano-second, Dendreon went from obscurity to savior.
Investors holding Dendreon stock suddenly found themselves instant millionaires.
Dendreon is an excellent example of how a stock can shock the market, or what I call a “mini-Black Swan.”
You see, in early March of this year, Dendreon’s stock was trading for less than $3. Its market cap was less than $300 million… a true microcap by definition.
If you peruse the stock message boards on Yahoo! Finance prior to last week’s announcement, you’ll see everybody and his brother badmouthing Dendreon, calling it a “POS stock” and a “quick way to land yourself in the poorhouse.” “Go short or go home.”
Then came April 3, 2009.
On that day, Dendreon traded a mind-boggling 22.6 million shares. To put that into perspective, Dendreon traded 2.4 million shares the day before.
In fact, here’s the historical trading action of Dendreon for March and April:
The April 3rd trading action is a volume spike. In other words, volume was surging from unusual buying on no news.
The trading was so frantic, Dendreon was trading nearly 58,000 shares every minute!
This prompted Dendreon to put out a public statement. According to a Reuters release:
A spokeswoman for the U.S. biotechnology company Dendreon, Katherine Stueland, said she knew of no clear reason for the stock gains. But she noted that the American Urological Association on Friday had reserved a time slot at one of its upcoming scientific meetings for Provenge researchers to present findings from a late-stage trial of the product.
“We don’t know whether we’ll definitely be releasing the data there,” said Stueland, who noted the urological group had invited Dendreon to make a “late-breaker” presentation on April 28 at its meeting in Chicago.
What was really going on?
Easy. . .
Somebody close to the situation probably leaked — intentionally or unintentionally — the results of Provenge ahead of the official release date. If that was indeed the case, the leaked information of positive results would have spread throughout the market like the waves that result from a rock thrown into the middle of a pond.
Then on April 14, Dendreon announced those results. . . and thus created the mini-Black Swan.
The Black Swan theory refers to a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations.
The theory was described by Nassim Nicholas Taleb in his 2007 book The Black Swan. Taleb regards many scientific discoveries as “black swans” — undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War I, and the September 11, 2001 attacks as examples of Black Swan events.
The term Black Swan comes from the assumption that ‘All swans are white‘. In that context, a black swan was a metaphor for something that could not exist. The 18th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass.
To put it another way. . . a single observation can erase thousands of years of belief or what’s considered fact.
If you take that theory and overlay it on a much smaller model, you can potentially make some money finding stocks that shock the market with their own version of a Black Swan.
And there’s no better sector to do this then biotechnology.
Investing in Biotechnology Stocks
I can give you hundreds of examples of biotechnology stocks doubling. . . tripling. . . quadrupling in a single day because they’ve announced positive results on a drug and the marketplace has interpreted it as a cure for cancer, or some other major disease.
But the best example I can cite is Entremed. In 1998 Entremed, a rather unknown biotech company, shocked the market, and its stock went nuts. Here’s the chart:
I have written my views of the biotechnology sector and how I believe this century is the “Biotech Century.” I truly believe that — next to robots — biotechnology is the next big bull market.
As a result, Ian Cooper and I have decided to construct a database of all publicly traded biotech stocks. The database will be robust, assigning values to each company’s drug development pipeline with a coordinated timeline for the respective drug’s progress through clinical trials and eventual FDA review.
We will couple this database with a trading monitor to detect unusual buying (or selling) patterns in the companies’ stocks.
In other words, we’re going to attempt catching Black Swans in the biotechnology sector before they are realized by the market.
Next week, I will reveal a biotech stock I think is ripe for a Black Swan.
Profitably yours,
Brian Hicks
Publisher, Wealth Daily
Editor’s Note: Readers are still emailing Ian Cooper with thanks and praise for his Dendreon call (One reader even claimed a million-dollar windfall from this amazing biotech trade.) But, as Ian is quick to point out here in the office, when it comes to making his readers money… he’s just getting warmed up. Fortunately for Wealth Daily members, there’s still time (a little more than 24 hours, in fact) to take on Ian in his 50-trade “gauntlet” challenge. Click here to learn more.
