A Strategy to Cash In on the Golden Age of Biotech

When I got my first job analyzing biotech stocks, there was no established way to analyze them. These companies had new science, and no biotech company had established a tried-and-true business model as a beacon for others to follow. Therefore, I had to use my own direct experience and common sense to invent techniques to figure out when biotech stocks were cheap and when to buy them. And I’ll admit that I had to work out through trial and error when to buy and when to sell them. The key, of course, was to make — not lose — money doing this.

I was there at what I would tell you was the most important moment for investing in biotech stocks, which was the year 1999, one year before scientists decoded the human genome. First, once the human genome was decoded, we were able to look into our bodies and see what genes we have. Second, it was also the year that marked a huge biotechnology bubble that birthed most of the companies that dominate the stock market in this area today.

Let me make this 100% clear: Biotechnology stocks are absolutely not in a bubble.

It’s good for investors, but also good for all of us as human beings as we get new medicines for cancer and many diseases for which we had nothing before. People suffered and died because we didn’t have these medicines. These days, I believe we are in a golden age for biotechnology. The medical breakthroughs we are going to see in the coming decades are going to make fortunes for some investors. But many people are going to miss out by listening to naysayers. Some of these naysayers are out there right now, quacking like ducks and telling you that biotechnology stocks are in a bubble.

Let me make this 100% clear: Biotechnology stocks are absolutely not in a bubble.

Biotech stocks are real companies with billions of dollars in revenues and profits, and equally importantly, they are making medicines that may be critically needed by you, your children and eventually your children’s children.

So don’t be scared by what you may read on some website or see on TV. All stocks, including biotech stocks, go up and down. No stock only goes up. Right now, some investors are running scared out of biotech stocks.

When I was coming up with my own investment strategies, I looked to Benjamin Graham for a value investing technique. As you may know, Benjamin Graham is the name of the man that invented what many consider the most respected and most profitable form of investing: value investing. Warren Buffett learned value investing directly from Benjamin Graham, and to this day, he credits Graham for teaching him how to spot a bargain in the stock market.

Value investing, as you may know, is about buying stocks for less than they’re worth. Now, that sounds obvious at first. But let me show you an example of what I mean…

After the stock market crash in 2000, nearly every biotech stock was worth less than the cash they had in the bank. Seriously. You would find biotech companies with $100 million in cash, but their stock market value was half that. And if you looked more closely and crunched the numbers, you could see that these companies also had little or no debt.

Those are two positive things that you want to see in stocks you own. But most important in terms of trying to figure out what would make these companies’ stock prices go back up was the fact that they owned valuable assets. Like what, you want to know?

  • Like drugs for cancer, diabetes or rare diseases (called orphan drugs) that were not yet available to patients; that is, they were still in clinical testing
  • Other valuable assets including patents, licenses and research knowledge that had been accumulated, which, you could work out, was worth millions.

But the stock market was valuing these assets as if they were worthless. Zilch. Bubkes. Using Benjamin Graham’s value system of analysis, it became clear that these stocks were bargains.

I began to learn other strategies in my time trading biotech stocks, but truth be told, the Benjamin Graham way of investing, which I applied to biotech stocks, is my favorite. Because it’s basically like getting money for free, before the market realizes what has happened.

Graham was the first person who clearly showed people that when you go to buy a stock, it’s absolutely critical to make sure that you’re paying less than what it’s worth. For example, if you buy a stock for $5, Graham said, you need to make sure it’s worth $10. That way, when the market figures out that the stock is worth $10, you’ll end up making 100% on the deal.

I know many of you may think that this is obvious or even silly. But as crazy as it may seem to you, this notion of buying VALUE — meaning that you should buy a stock because it’s clearly undervalued based on evidence — had to be invented by Benjamin Graham. By invented I mean that Graham showed people how to use this new way of buying and selling stocks systematically and consistently to make money.

And before you laugh at the obviousness of Graham’s invention, just remember that human beings believed that the sun revolved around the Earth. And we believed it long after we had proof that it was the Earth that revolved around the sun. Now, don’t get distracted. I am trying to make a very serious point: Value investing seems obvious today, but it was not for nearly 100 years after the development of the stock market in the U.S.

So do you know what investors did before Graham showed up with his value investing invention? They mostly gambled on wild speculations in the stock market. And the few conservative investors that invested in stocks bought them based purely on the dividends that they paid out.

I want you to think of it like this. What would you do if someone offered you the opportunity to buy $1 for 50 cents? You’d take it and ask if you could buy some more.

You don’t need any knowledge of biotechnology or biology to figure this out. That’s just common sense, something that your 10-year-old son or daughter could figure out. In other words, it’s a good deal if you are capable of doing plain ol’ one-plus-one mathematics.

Tomorrow, I’ll tell you about another one of my biotech trading strategies.

Regards,

Paul Mampilly
For Tomorrow in Review

Ed. Note: Paul has been a part of a hedge fund team that managed $10 billion. And there’s one sector he specializes in that he says is rife with investment opportunities: biotechnology. In today’s issue of Tomorrow in Review, he gave readers his No. 1 rule trading strategy for very specific biotech stocks… and explained how it could help them build their investment fortunes. Sign up for the FREE Tomorrow in Review email edition, right here, to start getting these kinds of expert tips before anyone else.