Investing in biotechnology can be exciting, profitable, and
loaded with land mines. For every company that hits the jackpot
with a new marketable drug that makes it through the FDA gauntlets,
there are a dozen stocks that run-up on such hopes and then crash
and burn when the trials fail.
For this reason, some investors consider biotech stocks to be
binary trades. Years ago I met some option traders who specialized
in these "event" stocks and they called them "bipolar."
Whatever you want to call them, you have three basic routes to go
if you still want to participate in biotech stocks:
1) Stick with large-cap, established businesses with deep and broad
drug pipelines like
2) Plow into lots of homework on the small and mid cap names with
promising new research and good Zacks Rank earnings momentum. Note
than many of these companies may be as yet unprofitable, but they
still often earn a Zacks #1 or #2 rank if the trend of Earnings
Estimate Revisions (EER) is rising sufficiently.
If analysts suddenly see a company making it through some FDA
hurdles of testing with one or more drugs for some form of cancer
or other medical need that represents a significant market
opportunity, they will begin raising estimates to account for this
potential profitability. The takeover component of valuation is
also a factor since big biopharma loves to scoop up hot new
Small and mid-cap biotech companies that I had some homework and
investing success with in 2012 were
But even these stocks had wild swings and if you were on the wrong
side of the earnings or FDA trend, you got burned. Which brings me
to a third way to play biotech with less volatility and
3) Buy the
Nasdaq Biotechnology Index ETF
). In March 2009, when it looked like stocks had made a trade-able
bottom during the financial crisis, I wasn't out there picking
individual stocks for people. But in my first appearance on
business TV, I said it was a no-brainer for investors to put money
into the future by buying two
: Technology through XLK and Biotech through IBB, which was trading
around $63 at the time.
Here are some vitals on IBB holdings and weightings from the
And here's a monthly price chart since early 2008.
The IBB is near its all-time highs above $148. Am I saying you
should buy it now at $145 after you just missed the drop in
November to $125?
Yes, I am. At least a partial allocation. If the broad market goes
on to make new highs above S&P 1550, biotechs will be part of
the story and the IBB will make new highs as well.
And in the big picture, if you want exposure to the future of drug
medicine, this is one of the safest ways you are going to find. The
current waves of growth here are in R&D that is exploiting new
knowledge of the human genome to create new drugs and treatments.
Genetic targeting of diseases is a multi-billion dollar growth area
that has large pharma firms like Pfizer, Bristol-Meyers and Merck
scrambling to buy up younger companies with innovative science.
My best sense of the future of medicine is that 5-years from now
more than half of the names in the top 10 of IBB will be different,
but this index ETF with probably have net assets that put its price
north of $200.
Even if I'm wrong, buying below $150 and trading the swings on the
way to $175 in a few years isn't a bad way to participate either.
Kevin Cook is a Senior Stock Strategist with
AMGEN INC (AMGN): Free Stock Analysis Report
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GILEAD SCIENCES (GILD): Free Stock Analysis
ISHARES NDQ BIO (IBB): ETF Research Reports
VERTEX PHARM (VRTX): Free Stock Analysis Report
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