What The Wall Street Journal Missed

If you’re nervous about investing in biotech stocks, you’re not alone.

Biotech stocks can be scary. They are based on a lot of hope and promise, and they do appear to traditional investors to have gone too far too fast.

In October 2013, The Wall Street Journal ran a story saying that biotech stocks might be too overpriced.

Here’s the second paragraph of the article:

“‘We like to invest in companies with innovative products, but at reasonable prices. Biotech has become too rich for our tastes,’ says Curt Gross, research director at FAI Wealth Management in Columbia, Maryland, with $325 million in assets.”

Boy, I’ll bet Mr. Gross could kick himself now for saying that, because most biotech indexes are up 50% since then.

But in a way, I don’t blame him for being cautious.

If every new drug that comes along gets priced the way some of our newest drugs have been, the biotech capitalization is unsustainable.

I’m thinking, for example, of the hepatitis C cures that cost nearly $100,000. I’m thinking of a therapy in the works that the company is planning to price at $250,000.

I’m thinking of a company that is already preparing insurance companies for the fact that its CAR T therapy for cancer may cost $300,000 per patient.

There’s clearly something of a bubble in our expectations about how many biotech companies can be successful and how much we can pay for their brilliant therapies.

Some of those bubbles will burst.

Yet we have never before in human history been looking down that tunnel at such a bright light.

Small biotech companies with big therapies that are successful will see their stock prices double, and then redouble, and then redouble.

But it will be a roller coaster. Biotech is a disruptive field with lots of players, so expect downs as well as ups.

A reader of my Breakthrough Technology Alert wrote to congratulate me because he had just sold some shares for a nice double. He had waited after my recommendation for a pullback, which never came, and bought in at about $40 a share.

He sold when it reached $80. He was afraid. What had happened to his shares clearly went against everything he had learned over many years — that a stock that doubles in a month or two is a gift horse and you’d better sell before someone looks at its teeth.

My message to you when you invest in biotech stocks is you should not panic and sell a stock just because it has increased dramatically in price.

In most of investing, where incremental increases in stock prices over lengthy time frames constitute success, entry prices are crucial.

Biotech investing — at this point in time — is different.

If you’ve done your homework — waited long enough to be reasonably certain the company’s therapy is more likely to work than not and examined the underlying science as well as the quarterly reports — you want to get in as soon as you make the decision to invest.

Every time I make a recommendation when a stock has been soaring, I’m tempted to tell readers to wait a bit for a pullback. But I don’t. I’ve learned the hard way that although a pullback sometimes comes, the recommendations made in this portfolio are far more likely to go up, and to go up suddenly, than to go down. When a pullback does come, it’s impossible to know when to act. Is that price the bottom? Will the stock go down more tomorrow? Don’t ever let yourself get into that place.

We are not traders. We are investing in solid science. And science is the driver of wealth and prosperity.

If you had purchased shares in the 13 companies I have recommended over the past 15 months when I recommended them, you’d be much further ahead now than if you had waited for pullbacks, even though a number of them did pull back before they went up again.

From Feb. 25-April 14 last year, biotech essentially crashed. It performed another, though less dramatic, swoon last September. Those are steep hills on this roller coaster ride, and you simply must accept that it is a roller coaster and not all the hills will be up.

Despite those swoons, most biotech indexes are up more than 50%.

If you do accept the volatility that comes with biotech investing, you’ll likely be a winner.

Because the reason other people — smart people — are investing in these companies is that we are on the verge of seeing cures for many cancers and much of heart disease — not just treatments for these diseases, but cures.

Regards,

Stephen Petranek
for The Daily Reckoning