At the start of 2017, I called for a resurgence in the biotechnology bull market that was slowly attempting to recover from its 40% bear market of the prior two years.
In response, my team and I here at Zacks worked to design a new type of portfolio, Healthcare Innovators, to capitalize on the long-term trends I saw that would sustain the return of the bull.
What we got was a 34% surge in the Nasdaq Biotech Index (IBB) to January 29 this year. This explosive rally gave us gains like 155% in Sangamo (SGMO), 119% in Sarepta (SRPT), and 98% in Juno (JUNO) in a matter of months.
But the current market correction has shown no mercy to any sector and so the volatility and uncertainty prompted me to dig further into the current state of the biotech bull market.
What I found is that the same long-term drivers are still in place. As I outlined earlier this week, I call them my "4 megatrends" of healthcare investing: (1) an aging population living longer and requiring more care, (2) an explosion of scientific discovery from the "genome goldmine" to battle disease, (3) powerful earnings leverage from life-enhancing technologies, and (4) the highly-motivated forces of M&A by big BioPharma to acquire new scientific assets and revenue streams.
Continued . . .
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4 Keys to Play the Biotech Bull
My conclusion remains that the Biotech bull still has a lot more room to go over the next 2 years. And once in a lifetime wealth-building opportunities await investors who play the right industries and companies over the next decade. But the rules are different this time in this second big wave of the Bio Bull. You can't simply ride the next hot tip or momentum play. Your research and stock selection must have certain discipline, or else you'll get burned.
Here I share 4 keys in my research process and why they are so important.
1) Investment Bank Research
I read dozens of research reports every week from Wall Street's top investment analysts. Of course, we all know that these analysts are conflicted occasionally as one side of the company is providing advisory or capital/underwriting services for a fee, while the "pure research" side is not supposed to be influenced by that business.
But for the most part, there are many good and un-conflicted analysts devoted to their research. Many are PhDs in the life sciences, or even have medical degrees, and they care about the quality of their analysis. Reading their reports every week gives me an edge on understanding the most complicated investing in the world.
The payoff here was greater confidence in my thesis to buy Sangamo Therapeutics last year. This was a low-risk/high-reward bet that they would be a game changer in the exciting field of gene editing. We took 155% gains in SGMO in February after Gilead Sciences created a partnership worth as much as $3 billion to the company as its pipeline developed.
2) Big Brother Partnerships
How do you build a billion-dollar business in medicine? Sometimes it takes a few hundred million dollars in R&D. That's where big Pharma companies come in to help emerging ones with drug pipeline clinical trials that keep the FDA happy. The big firms are constantly looking for exciting new R&D, often before it even leaves university labs.
When I see a big company -- whether from traditional Pharma or Biotech -- team up with a little guy, I know something good is in the pipeline and I start paying more attention to that potential breakthrough. If "big brother" helps get my target through Phase 2 clinical trials with positive results, the stock may already be on the launch pad.
Knowing the long-term commitment of partner Celgene to the emerging field of "immuno-oncology" gave me the conviction to buy Juno Therapeutics last year in the low $20s. We ended up swing trading JUNO once for 70% gains in August and then made another 98% on Celgene's buyout in January
3) Medical Journals, Company Presentations, and KOL Circles
There are many great places that new research can be found and company presentations are some of the best. Company scientists know they can't just "pull the wool" over the eyes of Wall Street analysts. When they publish in peer-reviewed academic journals or make presentations at industry conferences, there are just as many doctors in the room as number-crunchers.
And those presentations often are placed on company websites where I can see the entire slide deck and watch video recordings. This is a great way to not only understand new science but also to be tuned-in to the criticism from scientific peers. You can't really understand an R&D thesis unless you can also point out its potential flaws.
This brings up a class of expert known as the KOL, or Key Opinion Leader. In BioPharma especially, there are hundreds of doctors and researchers involved at all levels of drug and disease R&D whose opinions are widely respected in the global medical community. For doctors at the front-lines taking care of their patients, who don't always have time to stay up-to-date on the latest research, the view of a KOL can often be an important influence in their decision to try a new treatment option.
And it's how I decided to pull the trigger on Sarepta Therapeutics last May as they tackle a unique disease called Duchenne muscular dystrophy. SRPT's progress in crossing regulatory hurdles and advancing its pipeline handed us a gain of 119% in March.
4) Institutional Buying and Selling
Lastly, I still like to pay attention to what the big money is doing. There are many fund managers running tens of billions in investment war chests that are ear-marked solely for the healthcare field -- and some are focused entirely on biotech, like the $15 billion Baker Brothers funds run by the fabulous, real-life brothers Julian and Felix.
Many of these managers are some of the most serious and disciplined of medical sector investors. So, I pay attention to what they are buying and selling and I don't mind following their money trail if enough of my other criteria are in line.
My two most fascinating places to "follow the money" right now are in the exciting fields of immuno-oncology and gene editing, especially with the CRISPR companies. In my Healthcare Innovators service, I currently own a leader in each field that both saw open portfolio gains of over 100%.
During the correction, these two stocks have both given back a chunk of those open profits. But I will continue to hold and accumulate them because their scientific and commercial promise is so strong.
And if there is one thing I have learned from the big and smart money it is this: holding on through volatility is how long-term wealth is built in Biotech.
Focus on the Long-Term Drivers
To pursue the "megatrends" of healthcare investing, I invite you to join me inside Zacks' investment portfolio, Healthcare Innovators.
It's designed to capitalize on those long-term drivers. And I am confident that the next wave of the Biotech bull market is about to roll in.
But not all boats will rise with this tide. Using the 4 keys of my research process, we are picking powerful scientific assets, brands, and cash-flow franchises that will come out on top for strategic healthcare investors.
That is how, already in 2018, we have closed wins of +155.6%, +119.1%, +75.6%, and +98.1% in as little as 5 weeks.
Of course, picking the best stocks in this sector requires a considerable amount of research. But you don't have to follow FDA filings or subscribe to medical journals. That's my job! Healthcare Innovators enables you to piggy-back on my research, and we'll go after exceptional longer-term gains together.
There couldn't be a better time to get started than right now. Recent market pullbacks offer us excellent entry points for stocks with massive gain potential.
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Kevin, Senior Stock Strategist at Zacks, is a leading expert in biotech and medical stocks. He provides commentary and recommendations for Zacks' investment portfolio, Healthcare Innovators.