Investing in biotech stocks, how to pick stocks?

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Answered by: Heidi, An Expert in the Biotech Investing Category
The burgeoning biotech industry remains an enigma for most do-it-yourself investors and they tend to stay away from these type of stocks. You take on risk when investing in any stock on the market, but when investing in biotech stocks you often see wild swings in investor sentiment due to the volatile environment of research and development of new products.

The development of new medicinal products for humans in the United States is heavily regulated by the Food and Drug Administration (FDA) and therefore companies often have to spend a lot of money and jump through many hoops in order to get a product, or augmentations to a product to market. If you keep up with biotech investing news and charts you will notice that around the time of research result reporting stock prices will move sharply as investors anticipate the prognosis of these reports. Nine times out of ten these are the worst times to jump into a biotech stock.

As far as investing in biotech stocks, there are a few different groups that are basically based around the size of the company. For example, Johnson and Johnson is a large-cap stock that has a great track record and gives a 3% dividend every year. These types of stocks are considered to be safer than stocks offered by smaller companies because they have an established market share for their products, an ongoing relationship with the FDA and they offer a dividend which hedges an investor against the possibility of a bad year in overall returns.

Mid-cap companies are medium sized companies that usually offer a smaller variety of products and have research and development departments that are a bit more focused than larger companies. When investing in these type of biotech stocks you are going to take on a bit more risk and will want to do more research on the company before throwing your hard earned money at it.

Some of the things to look for are; how long has the company been around, what type of products are they researching and how does their balance sheet look? For instance, if a company is getting close to the end of a phase three clinical trial and its earnings per share (EPS) is on the low side I might consider buying a few shares. But, you have to keep in mind, that if you are hearing about clinical trials on sites like Yahoo Finance, savvy investors are already in and will probably be out before results are reported; the same happens with small-cap companies and pink sheets or penny stocks.

The thing about mid-cap biotech companies that make them hard to invest in, is that the risk you are taking is pretty high and primarily result oriented while share price is high as well. This is the same for small-cap biotech companies as well, although share price is usually lower.

If you want to get in on biotech investing and do not want to choose stocks on your own you can invest in an exchange traded fund (ETF) which is comprised of a basket of stocks from companies of all sizes chosen by professional analysts. One biotech ETF that has done extremely well over the last decade is the iShares Nasdaq Biotechnology (IBB) ETF. If you find that you really want to have control over the biotech stocks that you invest in and don't know where to start to look beyond what is in the news, a great way to do that would be to look up the holdings of a biotech ETF with a positive track record and research your favorite companies on the list. Using this method (with, say, the IBB ETF) will cut the seemingly never ending sea of companies down to under 150 stocks picked by professional analysts.

This way you can easily research and choose to invest in companies with ideals that match your own and are vetted to do well in the future. I cannot however, stress enough, that smaller sized companies that are all over the news or the internet with great increases in share price and volume are companies that you will want to step back from and at the very least wait for the hype to die down before investing. I have made the mistake of investing in biotech companies in this situation multiple times and have never profited using this strategy.

You can also search for recently reported, current and recruiting clinical trials. The best way to search this site would be so search by condition, disease or sponsor. This way you are sure to get the latest and greatest information on the biotech world at the human level. May biotech allow you to live longer, make your investments grow and enjoy the journey along the way!

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