The future is biotech

October 31, 2019    Portfolio Idea Biotech

This month, I’m looking at an industry that’s only recently became popular and promises potential large gains. Of course, with large gains comes a lot more risk and volatility, so please look away if you want a steady portfolio.

I would never suggest that biotech stocks should be the only thing in your portfolio. But if you already have a solid basis and feel ready for a wild ride with part of your portfolio, you should definitely come closer and read on.

Biotech

Biotechnology, or biotech for short, has been around for ages. It’s only fairly recently that the term has become synonym with companies trying out all kind of new scientific discoveries to find new medicines, diagnostics or even fancy fabrication techniques using biological processes.

The term is used freely for a very varied number of companies and most companies are on a journey of discovery, using experimental and unproven techniques. This means that many of those companies are not making a profit and may be destined to fail.

However, if a company manages to figure it out, it usually means the profits are huge and investors may get a big payday.

Intrinsic Value

Valuing a company that’s still trying to figure out what it’s going to sell is difficult. What companies are going to do well and what companies will fail? Even if you have a very scientific background, it’s hard to tell the winners from the losers.

In the perfect world, you’d:

  1. Make an inventory of all the research that the company is performing,
  2. Figure out how much money they will be able to make in the future,
  3. Add a discount for uncertainty.

This figure is what you’d call the intrinsic value of the company.

Now you can compare the intrinsic value to the market value and find cheap companies.

As you can imagine, it’s incredibly complicated to do that calculation, even if you have the know-how.

So since it’s impossible, lets just look at formulas that smart people have already proposed. Buffet, Lynch, Graham, they all have their own way of calculating the intrinsic value. We’ll use one of Uncle Stock’s nice features: it has an average of all of those.

On top of that, I’m not going to look at the actual values, but at the growth (the compound annual growth rate or CAGR)

This Month’s Portfolio

This month’s criteria is looking for biotech companies that seem to be growing their intrinsic value the fastest:

  • Biotech company in North America or Europe.
  • Order by average intrinsic value growth rate (IV CAGR).
  • Remove companies that have an infinite growth rate.
Symbol Name Current price Enterprise value RSI IV CAGR
ARGX argenx SE 116.50 USD 2.94B USD 38 146%
CTMX CytomX Therapeutics, Inc. 6.47 USD 31.67M USD 62 104%
CDXS Codexis, Inc. 13.29 USD 651.14M USD 51 78.91%
REGN Regeneron Pharmaceuticals, Inc. 305.77 USD 32.00B USD 25 77.66%
JAZZ Jazz Pharmaceuticals PLC 123.49 USD 7.97B USD 57 52.56%
UTHR United Therapeutics Corporation 83.30 USD 3.07B USD 19 38.16%
BAVA.CO Bavarian Nordic A/S 161.75 DKK 564.32M USD 63 36.72%
ABC.L Abcam plc 11.30 GBP 2.94B USD 43 33.61%
ALXN Alexion Pharmaceuticals Inc 106.08 USD 23.37B USD 44 29.56%
ENTA Enanta Pharmaceuticals, Inc. 59.55 USD 870.30M USD 61 28.67%

As I said before, biotech companies can be a bit of a gamble. Lets see next year if this is a good way to find the winners.

Thanks to Uncle Stock for selecting this interesting portfolio.


My philosophy: If you want to invest and your goal is to try to beat the market, you need a system. You need a system that can decide for you what to buy, when to sell and not to panic when things go down. Everything starts with selecting stock. You should not just select random stock here and there based on whims or things you read. No, create a system that suites your style and follow it. These posts give you example of what such a stock selection could look like.

Unless otherwise noted, I do all my research through the Uncle Stock screener. It's a great tool to have in your belt. (note: this is an affiliate link, if you sign up, I get a commision)

Disclaimer: Don't believe anything I say or write. Always do your own research before making any investment decisions.