I absolutely love investing in biotech stocks. As a matter of fact, I firmly believe that many of these stocks are true game changers.
While individual research programs can get a little speculative, the odds of a successful cure for cancer, Alzheimer’s disease, diabetes or any of the other pandemic conditions that literally plague modern humanity (ahem) have never been higher.
COVID-19 was the world’s call to action. As new and mutated diseases emerge and evolve around existing therapies, the medical establishment needs to accelerate in order to keep up. That means shorter and more efficient clinical cycles. And it means more goal-driven research into which molecules, proteins and genetic triggers have the biggest potential to make a meaningful impact without being too expensive to develop or manufacture.
We want companies that can be profitable. As we’ve seen, the impact on suffering populations will be enormous. For investors in the right place at the right time, the financial rewards will be transformational. As we say around here, this is where world-changing products are created out of nothing but insight, dedication and the drive to improve human lives.
It takes insight to discover or synthesize an attractive molecule. Then it takes dedication to determine the right dosage, plan the commercial manufacturing process and prove to the regulators that your drug’s benefits outweigh any side effects.
The route can be precarious, with plenty of opportunities to lose years of hard-won progress and billions of shareholder dollars if the clinical data don’t line up with your best-laid plans.
People wouldn’t do it if they didn’t want to cure the sick. That’s what drives these companies. When everything works, it’s almost miraculous. Lives are extended. People become more productive, happier, healthier.
The companies that can make that happen see their cash flow move from zero to some positive number. The math looks a lot like the impact of a cure on human lives: hard to measure, but definitely a good experience for investors as well as patients.
And right now, we see the stocks working hardest toward transformational therapies experiencing more negativity priced into their stock price than hope. With so many other industries paralyzed in the pandemic, I see biotech as an industry that can provide health and wealth solutions.
Here’s Some Perspective on the Industry
Let’s take a look at the iShares Nasdaq Biotechnology ETF (IBB). The ETF has now recovered all of its early pandemic losses and is one more push of momentum away from all-time record territory. Even after correcting from the worst of its vaccine-spawned exuberance is 23% above its pre-pandemic peak.
That said, it takes a lot to push these stocks into the record zone. There are long periods when biotech, despite its essential role in pushing the medical frontiers, lags the market as a whole. And when the thrill swings too for in the other direction, you have to make big leaps of faith just to buy these stocks at all.Moderna (MRNA) is the largest holding in IBB coming in at 9%. The company leapt from the experimental stage to become a real profitable enterprise when the pandemic erupted. Before COVID, this company was lucky to squeeze $5 million a month out of joint research contracts with Big Pharma. Now, barely a year later, the urgent need for RNA vaccines translates into over $1 billion a month in revenue.
And now that MRNA is profitable, the stock looks cheap at the right levels. The only question is what management will do for an encore. They’re in the spotlight now . . . but nobody hopes for a repeat of the COVID experience. If anything, MRNA is now too mature to give us that exhilarating journey from zero to global hero ever again.
After all, it’s now the biggest biotech stock on the planet. Part of the challenge here, of course, is that many of the top 10 components of IBB, which make up 48% of the ETF, are large companies that have maturing products or are facing competition or patent expirations. Every day they go between breakthroughs brings them closer to that “patent cliff.”
Not all of them are even profitable at this stage. That’s why we look behind the index for smaller opportunities where a little good news can transform a balance sheet that’s otherwise built out of little more than hope.
We love the smaller companies in developmental stages with little to no sales or earnings. They’re speculative, forcing Wall Street to evaluate them on the probability that their science will one day turn into money and a sustainable business. We buy these companies based on the odds that they’ll change the world.
And remember, mergers and acquisitions are a fact of life in this industry as large players facing that patent cliff buy out their more innovative counterparts before they can grow into bona fide competitors.
We’ve seen a lot of favorite biotech stocks taken out for cash over the years. That’s going to continue. Right now, smaller names are at the top of my screen and, we suspect, Big Biotech’s shopping list as well. One way or another, this is where the thrill of tomorrow is lurking.
Not all of them will become a MRNA style blockbuster. Statistically speaking, one or two of them could even run out of cash on the way to clinical approval and have to sell their programs to the highest bidder. But if you’re eager to build a diversified biotech portfolio for the long term, skip the IBB giants and focus on the hot biotech stocks that I’m going to tell you about today.
4 Hot Biotech Stocks to Consider Right Now
Biotech Pick #1: Kaleido Biosciences (KLDO)
Buy Below: $12
What I love about biotech is the way it pushes the frontiers in the ways we inhabit our bodies. When it works well, we can treat metabolic disorders without conventional drugs all by using a chemistry-driven approach to treat disease and improve human health on the molecular level. That’s Kaleido.
Instead of manipulating the chemistry of the body itself, KLDO has created an entirely new drug platform that considers the body as the habitat for various symbiotic and antagonistic microorganisms, what the company calls the “microbiome.”
Think of it as an extremely sophisticated version of drinking kombucha or eating yogurt for their natural “probiotic” properties. It’s a staggeringly big field, theoretically as revolutionary as the initial shift from purely plant-based medicine to standardized pills formulated to reliably treat specific conditions.
Feeding those microbes KLDO pills effectively programs them to regulate their role within the body, replacing a failing kidney or liver without forcing dramatic diet changes. While current trials are small, they’re enough to test the theory.
I’m looking for clinical milestones over the course of the coming year.
Biotech Pick #2: Precision BioSciences (DTIL)
Buy Below: $10
This is our moon shot, an ultra-long-haul investment built around the potential of editing not only the human genome to eliminate diseases (now a familiar albeit still speculative theme) but other organisms as well. I think of this company as mirroring the recent combination of Bayer in the medical space with Monsanto in genomic seeds, albeit at a much earlier stage in its evolution and at a deep discount to historical levels.
The company is working simultaneously to cure cancer and create a variety of the canola plant that produces an oil that not just replaces fossil fuel but actively reduces greenhouse emissions. Either can change the world. Both together may even be a little too ambitious, but that’s what partnering with bigger companies or accepting a buyout offer is for.
DTIL can still go either way. If it hits, shareholders will cheer. And while the story remains speculative for now, aiming for the moon is what biotech is all about. Under the right conditions, this can easily be a $24 stock a year from now. Or it might take a decade.
Biotech Pick #3: SpringWorks Therapeutics (SWTX)
Buy Below: $75
This is one of the most basic stories in the entire healthcare field. SpringWorks could be a year away from curing at least two rare kinds of cancer, and investors can finally buy in after its market debut in September.
Even here, at $71, the stock has only scratched the surface of its potential while providing opportunities to accumulate at pre-IPO pricing if you keep your eyes open. The logic here is simple: with a portfolio of clinically validated therapies licensed from Pfizer, this company could be the next Mylan and deliver massive gains over the long term.
With the company in late-stage clinical trials on these cures, now is the time to start nibbling at what could become a blockbuster future. Ordinarily I’d consider this a long-haul bet. Even clinical success in 2021 isn’t going to create a profitable franchise for years to come, but here, with a market capitalization of roughly $3.5 billion, there’s more ramp than backstory here now.
In the near term, this could easily give investors double-digit-percentage gains. Beyond that point, we’ll simply need to watch what comes out of the pipeline, assuming of course that Big Pharma gives us the chance.
Remember, GlaxoSmithKline has already signed on as a gigantic silent partner. They have $3 billion in cash on hand. If they like what they see, they won’t be shy about buying the whole company. We were here early . . . IPO Edge subscribers were here under $20. We might come back.
Keep The Biotechs Coming All Year Long
I enjoy creating these reports for investors because it allows me to bring new investment opportunities to light and highlight the level of research that we do in my flagship newsletter service, GameChangers.
This monthly online newsletter is geared towards individual investors looking for stocks that are changing the way we live and are poised to produce market-beating returns.
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|Ticker||Company Name||% Return|
|BBSI||Barrett Business Services||34.42%|
|FRGI||Fiesta Restaurant Group||25.55%|
|HOME||At Home Group||29.95%|
|TSS||Total System Services||25.93%|
|TTD||The Trade Desk||41.16%|
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