by Marc Lichtenfeld, Advisory Panelist
Editor’s Note: On August 15, we’ll be expanding our expert list to include Karim Rahemtulla, Lee Lowell and healthcare and biotech expert Marc Lichtenfeld. They’ll be joining our current experts in providing you the best investing ideas and investment education every day. Recently, Marc showed his readers how he locks in his profits in hot biotechs. With a number of small caps exploding upwards over the last few weeks, we felt it’s time to revisit this partial profit taking strategy.
So your stock just went way up, now what do you do? We often hear from concerned investors who aren’t sure whether to hold on or sell it all after a huge gain.
For example, I’m used to explosive gains in the biotech world, but I’ve never seen a moonshot quite like this one…
Shares of Vanda Pharmaceuticals (Nasdaq: ) rocketed up by 625% on news that the company’s schizophrenia drug, Fanapt, was FDA-approved. Earlier, the stock had opened at $9.99, having closed at $1.08 per share on Wednesday night – that’s a massive 825% spike.
Even for a biotech veteran like me, a one-day percentage move like this is unprecedented.
When you reel in a big winner, you need to know when to dash off with the money. We recommend investors use trailing stops to help the lock in profits and prevent losses, but there is another strategy you can use when you see one of your holdings take off on you and that is to take partial profits.
Partial Profit Taking Lowers The Inherent Investing Risk
All investing carries inherent risks, even more so when we deal with small-cap stocks and the volatile biotech sector. We want to lower that risk whenever possible. However, that doesn’t mean we avoid risk all together – on the contrary.
It means that any position we enter should have significant upside potential to offset that risk. The more risk… the more profit potential I need to recommend the stock.
Sometimes, good news is already priced into a stock. In the case of Vanda Pharmacueticals, it clearly wasn’t. The reason why VNDA shares were so explosive is because virtually no one expected Fanapt to get the green light.
No doubt some VNDA investors were popping champagne corks, following the small-cap biotech’s liftoff. It’s probably made their year.
Others, however, are still trying to recoup their losses from the stock – even after today’s monumental surge. That’s because two years ago, VNDA was trading around $25.
