Biotech and mining may seem like entirely different industries, given their different products and objectives. Surprisingly, they share striking similarities regarding investment risks. While investing in them might appear like a green flag due to the potentially massive return rate, you have to be cautious due to the high risk of financial losses.
Let’s explore the nature of biotech and mining companies, their areas of overlap, and go over a simple yet effective method to steer clear of risky investments.
What is Biotech?
The biotechnology sector is comprised of companies applying science to create products and processes for healthcare, medicine, biofuels, and the environment.
Biotech is risky because a company may never take off if it’s potential, and often very promising, product never hits the market. The FDA might not approve a product or drug created by the company. If you had invested in the company thinking they were going to take off when a certain product hit the market, you would lose the money you invested.
There are many highly successful biotech companies including Eli Lilly, Moderna, Johnson and Johnson, etc. How many biotech companies have failed compared to these hyper-successful giants, though? The existence of these large and successful companies in the Biotech industry doesn’t automatically make the whole industry a green flag.
What is Mining?
The mining industry is part of the basic materials sector. It produces raw materials, industry metals, and precious metals.
Due to their risk level, the companies focused on oil, minerals, and natural gases are placed in the Junior category.
Junior mining companies are risky because they hope (need) to develop or find a natural resource or deposit to succeed. There’s uncertainty in their success. It makes them risky to invest in, because they may never take off.
Investors get roped into the idea that mining raw materials = an automatic green flag. They think there has to be a success because it’s just raw materials they have to make accessible. However, the resource has to actually be where they are mining, and have an abundant enough supply to make the company profitable. Neither of which are a given.
How are both of these industries related?
The biotech and junior mining companies are strongly related. They are both based on the assumption of success, which typically involves a high level of risk.
For biotech companies to be successful, they have to find a solution to the problem they are trying to solve. For example, Moderna finding a vaccine for Covid-19. Next they have to be approved by the FDA (along with several other steps). Finding the solution and getting approval from the FDA can take years, or it may never even happen.
For junior mining companies to succeed they need to find the natural resources they’re searching for or developing. Without a thriving location, they won’t have any returns.
Both bank on success without having it clearly within sight. Markets will try to sell you on the idea that “if they make it big, so will you”. We’re learning that’s not necessarily a green flag, though. Any company under those categories in the early stages is risky. Let’s discuss how to avoid that risk with a simple formula.
How Can I Avoid Investing in Just Potential?
Calculating yearly revenue is one simple way to exclude young biotech or mining companies that could be a higher risk. Why does this work? If the company hasn’t made any revenue, it probably hasn’t been approved by the FDA or has not yet found any of the resources they are looking for.
If you classify for biotechnology and hit “Go”, Equities Lab will give you 392 matches.
If you add an extra line and specify for “Total Yearly Revenue as greater than 0”, then hit “Go”, you’ll get a more narrow set of 239 matches.
What do these numbers mean? It means that 154 companies in the Biotech sector failed to make a yearly revenue greater than 0. Can we narrow down our search even more? Absolutely! While we do this let’s also go through a simple way to ensure that companies with a higher risk are excluded from our results.
Let’s classify the industry of metals and mining, which gets a total of 64 results. (There are fewer because it is an industry within a sector.)
When the specification for only companies with a yearly revenue greater than 0 is implemented, we only get 52 results back.
What does the difference in numbers mean? It means 12 companies in the Metals and Mining industry failed to make a yearly revenue greater than 0. Do we know the specific details of what they were searching for and if they could still find it? No. We do know that we dodged a risky investment simply by evaluating yearly revenue though.
Should you avoid investing in biotech or mining companies? No! Should you avoid investing in biotech or mining companies that don’t have a yearly revenue greater than 0? Yes!
There is success in a company that’s one in a million. Still, it’s better to look at what produces success from a quantitative perspective rather than just a “will this mining adventure result in oil?” strategy.