What to Look for in Biotech Stocks
Editor’s Note: Today, we’ll be hearing from Chief Income Strategist Marc Lichtenfeld, the biotech investing expert at our sister e-letter Wealthy Retirement.
He’ll share his top biotech investing advice for 2021 – including why he believes this sector is the most important one in the market.
Read on to discover how to pick the best biotech stocks!
– Kaitlyn Hopkins, Assistant Managing Editor
I got involved in the biotech sector in 2004 because I realized that no other sector had the same potential for enormous gains and sustained growth.
You’ve probably heard the stats by now. Ten thousand baby boomers turn 65 every day in the United States. And what do we consume more of as we get older? Healthcare.
As more people advance into their senior years, they get sick and require more medicines for difficult-to-treat diseases.
So if I could invest in only one sector for the next five or 10 years, it would be biotech. But how do you choose which companies to invest in?
As The Oxford Club’s resident biotech expert, I’m often asked what I look for when choosing biotech stocks.
Here are some of the things I want to see:
- Game-changing technology. I’m not interested in a company that has a cancer drug that adds two months of life over the existing standard of care. I want to see entirely new approaches to treating disease – something we’ve never seen before.
- Safety. A drug is unlikely to get approved if it is unsafe, no matter how effective it is. I pay particularly close attention to Phase 2 trial results because those are usually the first real indication of whether a drug is safe enough to try in a larger population.
- Upcoming catalysts. Biotech stocks can move quickly on news. I don’t want to be sitting with a stock for a year and a half waiting for clinical trial results. I typically want to see important trial data within six months.
- Cash on the books. Most small cap biotech companies are unprofitable and burn cash. I’d rather not be holding a company’s stock when management sells shares to raise capital. This dilutes existing shareholders and causes the stock to drop. If the company has a lot of cash already, it reduces the chance of seeing a stock offering.
- Smart money. I like to see investors who I respect own large holdings in the stock. When I see investors such as Felix and Julian Baker or others, I know some major-league brainpower has reviewed the company’s science and investment opportunity ahead of me and has decided to move forward. My confidence is also boosted when insiders own a lot of shares.
From there, I’ll dig into the clinical trials, investigate management to see whether there are any red flags and conduct other due diligence.
There are a lot of factors that go into deciding to pull the trigger on a biotech stock, but the above list is a good start.
Remember, no other sector regularly sees stocks move 50%, or even more than 100%, in a day.
Last April, Capricor Therapeutics (Nasdaq: CAPR) leapt 359% in one day after it reported positive early clinical trial data. And last May, Adaptimmune Therapeutics (Nasdaq: ADAP) flew 339% after posting positive data for its cancer drug.
And on March 18, 2020, Humanigen (Nasdaq: HGEN) closed at $0.45. The next day, it spiked as high as $2.04. Less than three months later, it cleared $6 per share. It spiked 353% in one day and 1,300% in 2 1/2 months.
I would argue that biotech is the most important sector in the market and will be for the next five to 10 years and beyond. Your portfolio should have some exposure to it in order to take advantage of its enormous potential.
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