What Happens When A Biotech Stock Blows Up: How Our Hedged Portfolio Method Limited The Damage With Cassava Sciences

Screen capture via Cassava Sciences' video for their Simulfilam Alzheimer's disease treatment.

When A Biotech Stock Goes The Wrong Way 

In our last post (Corona Doom 2.0: Vaccine Mandate), we mentioned a biotech stock that has done well since our system picked it: coronavirus vaccine maker BioNTech SE BNTX, which is up 93% since it hit our top names in May. We're not always so lucky though. Another biotech stock our system picked this year, Cassava Sciences, Inc. SAVA has struggled since. Maybe something similar will happen to the COVID vaccine makers in the future. Here's a look at what happens in our hedged portfolios when we get one wrong. 

Responding To A Crash Prediction In July 

In late July, the Fear & Greed Index hit the "Extreme Fear" level. 

Screen capture via ZeroHedge.

As we wrote at the time (Building A Bear-Proof Portfolio), our preferred approach to dealing with fear was to buy and hedge a handful of names we estimate will do well over the next six months. Our system isn't always right about those estimates, which is why we hedge. One of the names it got wrong (at least so far) was Cassava Sciences, which has an experimental drug candidate to treat Alzheimer's disease. Cassava Sciences appeared in the hedged portfolio we presented in our article on July 20th, along with the ProShares Ultra Bloomberg Natural Gas ETF BOIL, Peabody Energy Corporation BTU, Cleveland-Cliffs, Inc. CLF, Generac Holdings, Inc. GNRC, Green Plains, Inc. GPRE, and Overstock.com, Inc. OSTK. 

Screen capture via Portfolio Armor on 7/19/2021.

Cassava Sciences Collapses 

In August, a whistleblower petitioned the FDA to halt Cassava Sciences' clinical trial of its Alzheimer's drug. The company responded, calling the allegations "false and misleading", but the damage to the stock was swift. The chart below shows how SAVA has done since our site created the portfolio above. 

Our Hedged Portfolio Containing SAVA 

Here's how our hedged portfolio containing SAVA has performed over the same time period. 

As of Friday's close, our hedged portfolio was up 6.53%, net of trading and hedging costs, versus the SPDR S&P 500 Trust ETF SPY which was up 4.82% over the same time frame. That's despite one of the seven names in our portfolio being down nearly 40%. 

The Benefits Of Concentrating And Hedging

The benefit of concentrating your assets into a handful of names is that if one or two do well, they have an outsized impact on your returns. The benefit of hedging is that if one or two names do poorly, their negative impact on your returns is limited.