Biotech: The small or the large?

Biotechnology is one of the fastest growing industry, returning over 200% in the past five years. However, a lot of these gains come from smaller companies that “hit it big” when their treatment successfully makes it through trials. So the question then becomes: When buying bio, do you focus on the small fish, or the whales?

The Screens:

Baby Bio
In this screen we will be searching the market for small biotechnology companies that seem to be pouring money into research and are either in trials are gearing up to start them. 

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  • The earnings per share over the past year is less than 0.
  • The company is spending more than $5,000,000 every year on R&D.
    • Developing any technology is time consuming and expensive. By making sure the companies you are looking at are spending a minimum of 5 million dollars you will be able to cut down on analysis time, and make larger returns over time.
  • The close is less than 3 dollars
    • Until an idea is put into action that idea has no real value. Biotechnology companies have started to put their ideas into motion, but the ideas haven’t quite been realized in the testing and trial phases. For this reason, many of the best buys will have extremely low prices.
  • The net income of the stock must be growing over the past year.
    • Though we don’t look for profit, we do look for the fact that the company is growing and moving towards making profit.
  • The change of close over the past year must be over 15%
    • Again, we are looking for a company that is setting itself up for explosive growth in the near future. Finding a stock that has, over the past 12 months already beat the market out points to the fact that the company is growing, and ready to come out of the gate running

Bio Whales
In this screen we will be searching for biotechnology companies that have already established themselves and have made significant returns to investors and will most likely continue to do so.

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  • Earnings per share must be above zero
    • These companies, or most of them, have already released major drugs and should be returning a profit by this point
  • Net income must be growing over the past year.
    • Much like in the previous screener we want to make sure that these companies are still growing, because without growth there is no reason for the stock to move up any further.
  • The close must be over $20
    • Since most of these companies have already released their product, and we are looking for biotech companies that are less risky than their small cap counterparts, but still have the possibility of growing further.
  • The change of the close over the paste 90 days needs to be over 10%
    • Once a company, especially a biotech company, realizes explosive growth that growth needs to be sustainable over a period of time. By making sure that the company as seen at least a 10% change over the past ninety days helps ensure that the growth continues. 
  • The company must be spending a minimum of $100,000,000 every year on R&D
    • These are big boys, whales even, and we want to make sure that they are stepping up to the plate rather than shrinking away into the shadows hoping nobody notices them. By making sure each company spends at least 100 million dollars every year you know, as an investor, that these companies are out and ready push forward with everything they have. 

The Results:

Baby Bio: 

Total 5-year return  4557.33%
Annualized Return  104.32%
Total Trades  72
Best Trade  INHX(341.05%
Worst Trade  TTNP(-71.28%)

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Bio Whales:

Total 5-year return  291.34%
Annualized Return  50.09%
Total Trades  66
Best Trade  GILD(55.7%)
Worst Trade  SHPG(-10.89%)

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What are the Risks?

At this point you’ve probably been convinced that investing in the baby bio screen would be your best option, I mean look at that return, over 4,500% in just five years is pure insanity! And that’s really what it boils down to… insanity. Sure seeing that massive jump is great, and we all wish we could have bought into it way earlier but hindsight is always 20/20. We need to look in the now, and into the future. But, in order to do that we need to study the past. 

Baby Bio:
This is really the kicker. I know for a fact that your mouth started watering the moment you saw those returns. However, your brain should have been screaming at you to be skeptical. So how did Baby Bio return so much over the past five years? Where does it all come from? 

First, we need to look at how long this strategy has actually been effective. It is known that prior to around 2010 the whole biotechnology industry had a fairly mediocre performance. However, since 2010 there has been explosive growth across the entire industry. 

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As you can see, prior to 2012 Baby biotechs not only underperformed the market, they lost you money. At one point you would have lost over 90% of your account value. 

Not only do these stocks do poorly throughout history, the stocks that fit the profile have almost no indicators that would suggest a buy rating. Investing in this area of the sector, though it has made a lot of money in the past five years, is more a sophisticated form of gambling than investing.

Bio Whales:
Much like the baby bio stocks the bio whales didn’t start performing until after 2010, actually the larger companies didn’t start returning a significant amount until 2012. However, the biggest loss your account ever suffered was only 35%. Though it’s still not positive it’s better than an almost 100% loss, and can be recovered from. 

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Unlike the Baby Bio stocks many of the stocks picked by the bio whales screener have multiple indications that they would be a good long purchase. Not only that, but most of the picks are much larger and have daily news and in depth analysis – helping you become an informed investor rather than a clueless gambler. 

So, What’s Better?

Honestly? I have absolutely no idea. Personally I’d take  portion of your portfolio and experiment with both sides leaning more heavily towards one or the other based on how much risk you are willing to handle. Personally, being younger, I would lean more towards the baby bio picks, though I would put in extensive research on each company and try to be as informed as possible. My mom on the other hand would lean more towards the Bio Whales screen. She’s older and on her way to retirement in about 10-15 years. She’s more likely to take the lower return in order to make sure her money stays safe. 

So in short, neither investment strategy is better than the other. It just depends who you are and what sort of risks you are willing to take.

About Aaron G information

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