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Even the Best Growth Stocks Can Quickly Become Losers

The market is fickle, and the best growth stocks can quickly become big losers. To avoid hanging on too long, avoid sentiment and watch the chart.

It’s easy to see why Eagle Pharmaceuticals (EGRX) can light up the face of any growth investor who bought the stock in early 2015. Starting the year at 16, then blasting off from below 20 in February and running all the way to 100 in August, the stock qualified as the best growth stock of the year, even after drifting sideways to end the year at 89. Here’s a chart of EGRX for the full calendar year.

And here’s what I wrote about Eagle in my review of 2015’s best growth stocks.

#1 Eagle Pharmaceuticals (EGRX 16.0 to 88.67, +472%) — Eagle Pharmaceuticals is a New Jersey-based specialty pharmaceuticals company that focuses on critical care and oncology. The big spike the company experienced in February came from a licensing agreement with Teva to commercialize Eagle’s Bendeka, a bendamustine rapid infusion product. The deal also included up to $90 million in milestone payments and royalties.

That one piece of good news kicked the stock into gear and it ran higher all the way to August, when Teva put $30 million into Eagle’s bank account. At that point, profit taking (and a nasty market correction) took the wind out of EGRX’s sails.

Pharmaceuticals and biopharmas are often heavily represented among the best growth stocks of any year, since one piece of good news from a clinical trial or a tactical hookup with a bigger rival can transform a company’s revenue potential.

It’s also worth noting that EGRX’s 472% gain for the year was 222% higher than the next-best performer on the list, which is another reflection of the challenging market that prevailed during the year.

So I completely understand when I get questions from subscribers to Cabot’s advisories asking whether EGRX is a bargain now that it has corrected by 60% to around 40. They ask if buying a $100 dollar stock for just $40 makes sense, given its history.

But I have a simple answer to their question. It’s a big, fat “NO.” EGRX isn’t a bargain, it’s just a stock in a downtrend that included a high volume gap down in March and a failed rally in May.

Markets are remarkably unsentimental about past accomplishments. So if you want a picture of EGRX from the market’s point of view, here’s a chart showing what the stock has done in the past 365 days. It’s a very different picture.

From the market’s point of view, a past winner that’s fallen on hard times, especially in the news-driven biopharmaceutical sector, is just a loser.

Growth stocks are like princesses in fairy tales. They require suitors to pass certain tests before they can win the fair one’s hand in marriage. (And the marriage won’t necessarily be a long one.)

While the number of tests required to reach “happily ever after” isn’t long, it is absolute. And one of the most important tests is for signs that the stock you are considering is enjoying the attentions of a large (and growing) number of investors.

In other words, you need to see some momentum in the chart. A chart that shows a stock price in an uptrend is your first sign that something is working. And then you can start digging to find out the story and the fundamentals that make a stock a complete package.

Without going into a long disquisition about the company, here’s a biopharma that is getting a ton of attention from investors. (It also earned a place in Cabot Top Ten Trader, which is almost like the Good Housekeeping Seal of Approval for a growth stock.)

The stock is Emergent BioSolutions (EBS), and here’s how it has spent its last 52 weeks.

When you’re looking for the best growth stocks, a great chart isn’t enough all by itself, but if a strong chart isn’t part of the package, your chance of success is far lower.

Cabot Top Ten Trader recommends market leaders with strong charts and fundamentals before they are ready to break out.

Since January 1, the advisory delivered 101 winning trades, and investors grabbed 68% gains in Barrick Gold, 42% gains in Edwards Lifesciences and 55% gains in Universal Display, just to name the few. If you would like to start profiting from fast growing momentum stocks, consider taking a risk-free trial subscription to Cabot Top Ten Trader.

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Fortune Cookie

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Contrary Opinion buttons here.

“Always dream and shoot higher than you know you can do. Don’t bother just to be better than your contemporaries and predecessors. Try to be better than yourself.”

-William Faulkner

Mike’s comment: In the stock market, goals are a funny thing—if they’re too extravagant (gain 30% every year!) you’re bound to be disappointed. Yet if you have no goals, you’ll often realize just mediocre gains, or worse. The best part of this quote is to try to be better than yourself; to do that, you must analyze your successes and failures regularly, learn from them, and integrate them into your plan. Then your performance can shoot higher!

Paul’s comment: When the Cabot Investors Conference (August 10–12, this year) is on, I always enjoy the give and take with value and income investors who are very risk averse. They value predictability and safety above all. I try to nudge them toward taking on a little more risk, going for slightly higher returns by adding a few select growth stocks. It usually doesn’t work. But I’ll keep trying.


Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.