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5 Best Biotech Stocks to Buy Now

By Jeff Reeves, Editor of InvestorPlace.com

Biotech stocks to buy aren’t exactly the most popular investments on Wall Street right now.

The “risk on” environment of 2013 seems to have evaporated, with volatility heating up and many investors taking shelter in old stalwarts like consumer staples and even bond funds. Biotech stocks are often seen as risky and more speculative by investors, particularly those who prefer entrenched health care stocks like Johnson & Johnson (JNJ) or Pfizer (PFE) in Big Pharma.

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But if you’re looking for outperformance in 2015, then the modest risk but big-time potential of biotech stocks could be just what the doctor ordered.

There are many reasons to be bullish on healthcare stocks broadly — both because of the recession-proof nature of the sector, and the growth that is sure to come from greater access to insurance via Obamacare and demographic tailwinds thanks to aging Boomers who will need more care and medications.

Biotech stocks in particular are among the best stocks to buy because healthcare megacaps face questions of competition abroad, a strong dollar holding back international profits in 2015 and, of course, patent expirations on blockbuster drugs from years past

If you want to invest in tomorrow’s cutting edge treatments to day, the best biotech stocks to buy are the way to do just that.

SAGE Therapeutics

SAGE Therapeutics (SAGE) is a prototypical development-stage biotechnology company. No, the company isn’t profitable, choosing instead to burn cash in the hopes of research and clinical trials that result in a blockbuster drug. But don’t overlook it just yet.

SAGE just pulled of an impressive IPO a few months back, spiking 67% out of the gate and showing the big potential Wall Street sees in this company. SAGE is focused on treatments rare diseases, particularly those that affect the central nervous system.

SAGE stock is a top holding for one of the most respected and longest-running healthcare hedge funds out there, OrbiMed Advisors. OrbiMed runs more than $12 billion dollars at last tally, and boasts 80 experts on staff including not just investors but scientists and doctors who can properly assess a company like SAGE.

Their weight behind this $770 million company is telling, and an important endorsement.

SAGE recently received a “fast track” designation for its epileptic seizure treatment, known right now as just SAGE-547. The treatment has also been designated as an “orphan drug,” meaning that there aren’t many other options for patients suffering from the disease it targets. That’s great for doctors looking for new treatments, but also good for SAGE because it means very little competition should the drug be successful.

This notion of chasing niche drugs where there is little competition and big margins is an effective tactic for early-stage biotech stocks. Should SAGE see good results in clinical trials, the door could be open to big and sustained profits from this medication and others that are sure to come out in the years ahead.

Amgen

Amgen Inc. (AMGN) is one of the biggest global biotech stocks out there, so has a bit more stability that its smaller peers. Its biggest money-makers are Neupogen, a medication that helps cancer patients strengthen their immune system, and autoimmune disorder treatment Enbrel.

The company is growing briskly both through increased sales, a robust product pipeline and acquisitions. Amgen stock has posted 18% gains year-to-date, outpacing the broader market by more than 15 percentage points. AMGN stock is up 140% in the last three years vs. just 60% gains for the S&P 500 in the same period.

Amgen has purchased five other biotech players since 2012, including $700 million for Turkish pharma company Mustafa Nevzat and a whopping $10.4 billion for cancer drug pioneer Onyx Pharmaceuticals.

There is a risk that one of Amgen’s treatments for cancer patients, Neulasta, will lose exclusivity in 2015 and weigh on earnings. However, Amgen is pushing ahead with late-stage trials on 10 experimental medications that could deliver big results going forward. And it’s worth noting that year-over-year revenue has grown every quarter since before the Great Recession.

Amgen has a reliable enough revenue stream that the company started paying a modest dividend in 2011 and has steadily increased its payouts ever since; dividends started at 28 cents per share quarterly in 2011 and have nearly tripled to 61 cents currently. Rright now, AMGN stock yields 1.8%.

Broadly, big healthcare stocks are very stable investments even in a downturn. Amgen is in an enviable spot, where it is both a fast-moving biotech as well as an entrenched healthcare megacap with a $100 billion valuation.

iShares Nasdaq Biotechnology Index Fund

The iShares Biotech ETF (IBB) is a great way to play both entrenched players like the aforementioned Amgen as well as gain exposure to upstarts with big upside potential.

The top three IBB holdings right now actually include Amgen at No. 1, Celgene (CELG) at No. 2 and Gilead Sciences (GILD) at No. 3 — collectively adding up to more than $300 billion worth of biotech business.

These are hardly up-and-coming players, with all running very profitable operations and no risk of going to zero on one bad drug trial. And when you throw in the diversification appeal of this ETF, you have a very safe way to play the sector without taking on boom-or-bust risk.

At the same time, the IBB fund is peppered with smaller players that have potential to break out, such as Akorn, Inc. (AKRX) which has soared 85% in the last 12 months.

All told, the IBB fund is up an impressive 18% year-to-date vs. a nearly flat stock market. With $5.4 billion in assets under management and several hundred thousand shares traded daily, this is a legit and liquid biotech. IBB will cost you 0.48% in expenses (that’s $48 in fees annually for $10,000 invested).

Acorda Therapeutics

Acorda Therapeutics (ACOR) is another one of those small-time biotech stocks with very targeted treatments and patient pools. The drugs that Acorda produces focus on multiple sclerosis (MS), spinal cord injury and other nervous-system disorders.

Acorda has a number of treatments that have been approved, and as a result it is not bleeding cash like some smaller biotechs out there. At $1.3 billion in market cap, however, there is still significant upside for future growth — both through the drug pipeline and clinical trials, but also through acquisitions.

Consider that Acorda just acquired Civitas Therapeutics in September for $525 million in cash, as a way to obtain global rights to its Phase 3 Parkinson’s disease treatment known just as CVT-301. The drug is in phase 3 trials and could add a very exciting therapy to its product pipeline of future cures.

The downside is that Acorda just saw its long-term debt go from next to zero to about $290 million — nearly a third of its market capitalization. However, these kind of acquisitions are important for a company like ACOR that wants to step up from a small-time player to one of the bigger dogs in the space.

Shares have been choppy in 2014, but still remain up 10% on the year vs. a mostly flat market. There may not be an immediate payoff like the aggressive development-stage biotechs out there, but long-term treatments for conditions like MS and Parkinson’s could be big winners for Acorda investors.

ACOR revenue is set to top $400 million next year — double the $191 million posted in 2010 — and continued research and acquisitions show that Acorda isn’t slowing down.

SPDR S&P Biotech ETF

If you want to go smaller but still don’t like the risk associated with picking individual biotechs, consider the S&P Biotech ETF (XBI). As the name implies, it’s benchmarked to an S&P biotechnology index. This allows some modest players to get in there because the biggest players in the space are listed on the Nasdaq, and that makes the IBB biotech index pretty intimidating.

As of right now, there’s only a single pick in the top 10 holdings worth more than $20 billion — that’d be Vertex Pharmaceuticals (VRTX). And after that, Alnylam Pharmaceuticals (ALNY) is the only one of the top 10 biotech stocks valued at more more than $5 billion or so.

That’s in stark contrast to the top-heavy IBB fund that has a ton of megacap players.

Of course, the risk is that smaller companies means more volatility. But in 2014 that volatility has been to the upside, with the XBI is up 21% since Jan. 1, handily outperforming the major indices and other biotech investments to boot. Longer term, the XBI fund is up 140% in the last three years vs. just 60% for the S&P 500.

The SPDR S&P Biotech ETF boasts about $1.3 billion in assets and a gross expense ratio of 0.35% ($35 annually on $10,000 invested).

Learn more about this fund on the SPDR website.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.