If you’ve read anything I’ve written over the past few months, you know I’m strongly bullish about biotech investing in general and genomics in particular.
DNA-based medicine is a game-changer. It’s arguably the biggest health care breakthrough in decades. I don’t remember ever being more excited about a long-term investment theme. Whether the market goes up, down or sideways in the coming years, I believe biotech and DNA-science investors will make fortunes.
But this brings up a bigger discussion about how we should go about investing in this space. There is this perception that biotech is a risky market segment. Or maybe you think picking a biotech winner is like throwing a big plate of spaghetti on the wall and seeing what sticks.
Here’s the thing. Some biotech investments are like that.
Like Winning the Lottery
If you’re looking only at early-stage companies with no FDA-approved products to sell, then yes, the “spaghetti on the wall” analogy is difficult to defend against. Most of these companies are not yet profitable, and your success or failure might hinge on the approval of a single new therapy.
Some folks compare that to a lottery ticket. Several stocks might go belly up on you, but if you find that one company with the next major blockbuster — and you find it early — you may never need to work again. But of course, if you aren’t careful in how you allocate, there’s a chance you run out of capital before that day comes.
So, you have to manage your risk and keep your position sizes reasonable.
The Other Side of the Coin
But the risk profile is completely different for an established company with a portfolio of drugs that have either been approved or are at various stages of the approval process.
Consider these three factors:
- You know the drug works.
- The FDA has approved it for sale.
- There is a patent in place that protects it from competition.
With those three factors, you now have great visibility into that company’s potential cash flows … which makes it almost like investing in a bond.
You might not know exactly how many pills will be sold or what Medicare or private health insurance companies will be willing to pay. But you can get close.
It then just becomes an exercise in making sure you pay a reasonable price for the stock.
Balance Risk of Biotech Investing — or Any Market Segment
When it comes to investing in something like biotech, I prefer a “barbell” approach. It’s all about equal weight on both sides of the risk/reward spectrum.
I like the consistency of established players, particularly for stocks I intend to hold for a few years or longer. But I’m also a trader, and I believe that we can and should get more aggressive when the conditions are right by buying early-stage issues. As I said earlier, if you really hit a home run on an early-stage biotech stock, you can make years’ worth of profits in weeks or months.
We’ve been doing a little bit of both in Green Zone Fortunes. We recently added a biotech company to our portfolio with an established portfolio of neurological treatments … and a newly-approved one to boot.
But we also have an early-stage genomics play that’s already up triple digits, and I expect more gains to come. This is a company at the cutting edge of the trend I believe will change medicine forever.
To find out more about this DNA technology that I call “Imperium,” click here. You’ll see details on how I’m targeting the genomics stock mega trend through my Top 4 DNA buy recommendations. Go here to watch my presentation now.
I hope you will join us!
To good profits,
Adam O’Dell
Adam O’Dell is the chief investment strategist of Money & Markets and has held the title of Chartered Market Technician for nearly a decade. He is the editor of Green Zone Fortunes, the trend and momentum options-trading powerhouse Home Run Profits and the time-tested switch system 10X Profits.