Investment Thesis

Objective: Wealth-building of an always fully-invested portfolio via repeated near-term (weeks or months) capital gains from careful, diversified, odds-on issue selection and timely price opportunity capture.

The stocks compared here are Sarepta Therapeutics, Inc. (NASDAQ:SRPT) and Arrowhead Pharmaceuticals Inc. (NASDAQ:ARWR). SRPT was inadvertently omitted from the Biotech Developer review recently published. Rather than picture it by itself, ARWR is provided here as a best-ranked alternative.

These market pros have insights you and I can't have because their everyday job is to satisfy investment organizations running billion-dollar portfolios who want to adjust their holdings in multi-million-dollar trade transactions. These market-makers [MMs] have to round up sellers when their clients want to buy, and buyers when they want to sell. That's hard to do when most investors will hold off to get better prices, whether they are buying or selling.

And when lots of money is involved in each trade, the players get pretty careful about what they want to do and when they will do it. But the big-money types work hard to be on top of developments, following some issues intently, anticipating what is likely to be happening to stock prices in the near future. Depending on what they know, or think they know, and what they think others believe is likely to happen, they may take surprising postures. Often their holding-period horizons are months, not years. Or even less.

So, the MMs have to respond when a big-money house says "sell a bunch of this and buy a lot of that, and do it in the next 15 minutes, or you can forget about keeping us as a good repeat-order client".

The MMs will round up any of their other clients who they know have holdings in the stocks or appetites (at a price) to initiate, expand or contract holdings in the issues involved. It's rare when a "cross" can be made with enough "other side of the trade" exists at acceptable prices to "fill" the trade order without having to put some of their own firm's capital at risk in order to balance buying demand with selling supply.

As market-makers, they will provide the balancing position when they can set up a hedge deal to protect the market risk involved in their "facilitation" of the trade's being completed. If they can't, then the trade order gets killed, not filled, to wait for a time when the market is more accommodating.

But what it takes to buy that market risk price-change protection for the MM tells what the players on both sides of the "insurance" market believe can happen to the stock's price during the limited lives of the derivative contracts for options, futures, swaps, or other highly leveraged involved instruments used in the hedge.

That's where we find the balances between forecast upside price gain prospects and price drawdown exposures today and can compare them with what has been seen day by day over the past couple of decades. That is what supports the opening statements above about +15% to +30% gains in specific stocks. Those are fact-based histories of all prior real-market experiences from forecasts made before the fact, not just blown smoke over some after-the-fact single illustration of convenient history.

"Sarepta Therapeutics, Inc. focuses on the discovery and development of RNA-based therapeutics, gene therapy, and other genetic medicine approaches for the treatment of rare diseases. The company offers EXONDYS 51, a disease-modifying therapy for Duchenne muscular dystrophy (DMD). Its products pipeline include Golodirsen, a product candidate that binds to exon 53 of dystrophin pre-mRNA, which results in exclusion or skipping of exon during mRNA processing in patients with genetic mutations; and Casimersen, a product candidate that uses phosphorodiamidate morpholino oligomer [PMO] chemistry and exon-skipping technology to skip exon 45 of the DMD gene. In addition, the company's pipeline comprises SRP-5051, a peptide conjugated PMO that binds to exon 51 of dystrophin pre-mRNA. It has collaboration agreements with Nationwide Children's Hospital to advance micro-dystrophin gene therapy program under the research and license option agreement; Galgt2, a gene therapy program for the treatment of DMD; and Neutrophin 3, a gene therapy program to treat Charcot-Marie-Tooth neuropathies. The company also has a license agreement with Lysogene to develop LYS-SAF302, a gene therapy for mucopolysaccharidosis IIIA; a license and option agreement with Lacerta to develop treatments for CNS-targeted and lysosomal storage diseases; and research collaboration and option agreement with Genethon to develop micro-dystrophin gene therapy products. In addition, it has a research agreement with Duke University to advance gene editing CRISPR/Cas9 technology for restoring dystrophin expression; a collaboration agreement with Summit (Oxford) Ltd. to commercialize products in Summit's utrophin modulator pipeline; a strategic collaboration with Paragon Bioservices; and a strategic collaboration with CENTOGENE for the identification of patients with DMD in the Middle East and North Africa region. Sarepta Therapeutics, Inc. was founded in 1980 and is headquartered in Cambridge, Massachusetts."

Source: Yahoo Finance

SRPT's and ARWR's recent daily price ranges over the past 6 months are shown in Figures 1 and 2, along with measures of their current forecast price up-to-down balances. Also shown are the odds of long position gains being earned in the couple of months subsequent to points in time in the past 5 years when MMs had the same kind of outlook they have today.

Figure 1

source: Author

Figure 2

source: Author

As a contrast, here is what MM forecasts for the "market-index" ETF of SPDR S&P 500 Trust (SPY) looks like at this time:

Figure 3

source: Author

How effective the MMs have been in forecasting for these stocks is a matter of market records, when conditions of uncertainty similar to today's are examined. That was done in the row of data between the graphics of Figures 1-3. For ease of comparison, they are repeated and slightly expanded in Figure 4.

Figure 4

source: Author

As explained in the prior Biotech Developer revue featuring ARWR, the SRPT Range Index [RI] of 23 produced 108 of 124 net gain %Payoffs under TERMD of +30.1%.

A comparison of the +30.1% payoffs with the present forecast of +23.1% suggests an exceptional profit achievement with a degree of credibility for the current outlook of 1.30, as indicated at column [N] of Figure 4.

So much for the "good side" of a buy proposition; what about the "bad side"?

As we condition the credibility of the upside price change forecast by comparison with actual experience, so too do we look to see how bad the downside might get. But with concern only during those "long" holding periods when committed capital would be at risk under the TERMD discipline. All other periods are irrelevant, shocking as they may be.

Figure 1's data row tells what the worst case price drawdowns have been (an average of them) during all of each actual exposure period when they were to be held. What matters is how bad a fear of loss may get induced any time, not just whether or not it existed at the end of the holding. Investors will have varied reactions to the exposures, so there is no way to evaluate potential risk impact by historic outcomes. But some useful guidance may be provided by having knowledge of the maximum degree of intensity possibly becoming present.

One logically-simplified way to address the combination of stock price risk and reward is to weight each part by its probability and combine the two. The "Win Odds" of profitable position odds here for SRPT of 108 out of 124, or 87 out of 100 offer such a probability. One minus those odds, or 100 - 87 provides the loss probability weight. Thus 0.87 times +30.1% plus 0.13 times -8.7% produces a weighted net payoff of +25.1%.

To make this style of evaluation more comparable between varied investment opportunity situations, an integration of the likely holding periods used in the calculation is helpful. For SRPT, the average number of market days required by all 129 positions of the sample was only 40 out of the maximum 63 possible, because of the high proportion of upside target prices reached.

A standard evaluation measure used in many capital planning decision situations is the expected net payoff stated in "basis points" of 1/100ths 1%, per day of capital involvement. On a 365-day calendar year +19 bp/day when sustained for a year doubles the original capital, or a CAGR of +100%. When a smaller-count of 252 market days makes up a relevant year, the fewer days are each proportionally more powerful, so only 14 bp/mkt day does the 100% equivalent.

Comparison is the essence of evaluation. If the investing objective is to make capital as productive of future spend-able amounts as possible, using an odds-weighted bp/d yardstick can be helpful.

To that end, Figure 4 includes the relevant MM forecasts and their prior outcomes for ARWR and the market-index proxy of the SPDR S&P 500 Index ETF (SPY). Also, the average of some 2,700 current-day MM price-range forecast issues, and a ranked set of the day's likely 20 best of those near-term wealth-building stocks under TERMD portfolio discipline.

All of these comparisons in Figure 4 have the same basic data as included in the row of Figure 1 for SRPT. That is expanded by the columns [O] through [R] to provide for odds-weighted bp/day price-prospect evaluation comparisons.

Competition from the market-index alternative SPY at this point in time is rather limited because of an unenthusiastic upside target outlook of only +5.5% at a CAGR of only +9% and an Odds-Weighted net prospect [Q] of +0.8%. That is better, though, than the overall population of 2,711 where MM forecasts are a modest net decline (-2.2%).

Sarepta Therapeutics, Inc. and Arrowhead Pharmaceuticals Inc. both offer outstanding prospects for capital gains with strong odds for achievement in short periods of holding. SRPT has the larger potentials, but ARWR appears historically to have quicker achievement prospects. Payoff potentials in basis points per day are exceptional. For further information, please check my blog here on Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SRPT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So, our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name.

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Sarepta Therapeutics, Inc. And Arrowhead Pharmaceuticals Now Top-Ranked Biotech Stock Buys - Seeking Alpha

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