The biotechnology sector has been red-hot over the long term but out of favor with Wall Street over the past year. That mismatch is presenting investors a great opportunity to get in.
So which stocks should investors buy today? We asked a team of Motley Fool contributors to weigh in and they picked Cambrex (NYSE:CBM), BioMarin Pharmaceutical (NASDAQ:BMRN), and the SPDR S&P Biotech ETF (NYSEMKT:XBI).
Not every winner in biotech is based on a blockbuster
Chuck Saletta (Cambrex): The biotech industry is filled with minefields. First, there’s the research and development, where the outcome is never certain. Then, assuming the company successfully comes up with a decent prospect for a product, it has to make it through a long and costly testing and approval process before it can sell its wares.
Even once those hurdles are passed, pharmaceutical manufacturing is one of the most tightly controlled and heavily regulated industries out there. It takes incredible know-how and substantial investment to manufacturer medications to standards once they’re approved. Companies that are focused on research and discovery often find that they aren’t well set up to manufacture, so outsourcing the manufacturing process is often an attractive alternative to doing it on their own.
That’s where Cambrex shines. A partner capable of helping other biotech companies bring their products to market, Cambrex can win when any of its partners wins. That makes it less exposed to the “feast or famine” nature of the biotech industry as a whole. As a result, Cambrex sits in a fairly unique position of being well-positioned to participate in the ultimate success of the overall biotech industry, even without blockbusters of its own.
From an investor’s perspective, Cambrex currently trades at around 20 times its trailing earnings, and those earnings are expected to increase by around 15% annualized over the next five years. While not a screaming bargain, it does look like a reasonable price to pay today to have a decent shot of participating in the potential biotech revolution to come.
A basket approach
Brian Feroldi (SPDR S&P Biotech ETF): Picking winners and losers in biotech can be exceptionally hard. At the same time, it can be a mistake to ignore the sector altogether. What to do?
One simple solution is to buy an ETF that offers broad exposure to the sector. My favorite is the SPDR S&P Biotech ETF.
This ETF currently owns 119 biotech stocks of all different sizes. This includes a range of companies, from enormous biotechs like Celgene and Biogen all the way down to small caps.
One big reason why this ETF stands apart from others is that it uses an equal-weight strategy. That means the ETF invests the exact same amount of capital into each of its components. The ETF then rebalances itself each quarter. Following this strategy helps to prevent a single holding from becoming too big, and it gives investors exposure to small caps that hold enormous upside potential.
This ETF has the numbers to prove that its formula works very well over the long term…
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