Post on 21-Aug-2015
Scared of biotech?Biotech stocks have been the darlings of Wall Street over the past few years.Investing in biotech stocks, though, seems scary to many people.Here are 5 not-too-scary ways to make money from the booming biotech industry.
Source: Capture Queen on Flickr
1. Buy a biotech ETF
• One way to reduce risk is to spread your investment money across multiple stocks.
• Exchange traded funds (ETFs) provide a good vehicle to achieve this goal.
• Several ETFs are available that focus on biotech stocks.
Source: Simon Cunningham on Flickr
A good biotech ETF to consider…• The SPDR S&P Biotech ETF
(NYSEMKT:XBI) includes over 100 biotech stocks.
• No single stock makes up more than a little over 1% of the ETF.
• Despite a recent pullback, the ETF is up around 300% over the last five years.
Source: YCharts
2. Buy a big biotech’s stock
• When some think of biotech stocks, they think of highly speculative clinical-stage companies with no profit.
• Several big biotechs, though, have solid revenue and earnings – and some even pay out dividends to shareholders
Source: Wikimedia Commons
A good big biotech to consider…
• Gilead Sciences (NASDAQ:GILD) dominates the HIV and hepatitis C drug markets.
• Gilead’s 2014 earnings were $12.1 billion on $24.9 billion in revenue.
• The biotech pays out a dividend currently yielding 1.5%.
Source: Gilead Sciences
3. Buy a pharma stock with biotech tie-in
• If buying a biotech stock outright makes you jittery, another alternative is to buy a blue chip drugmaker with significant biotech revenue.
• Finding such stocks is getting even easier as Big Pharma companies buy biotechs.
Source: Wikimedia Commons
A good pharma stock to consider…• Johnson & Johnson (NYSE:JNJ)
checks off all the boxes if you’re looking for a blue chip company with exposure to biotech.
• While J&J’s business includes consumer products, medical devices, and non-biotech drugs, its Jannsen Biotech unit kicks in billions in revenue.
4. Buy convertible notes for a biotech• A convertible note is a bond that
the holder can convert into stock after a specified period.
• Many biotechs (particularly in their earlier stages) use convertible notes as an option to generate cash.
• Holders receive interest plus a chance to profit if the stock soars.
Bond
Stock
One example of a biotech convertible…• MannKind (NASDAQ:MNKD)
gives a good example of benefits that a convertible note can provide.
• Holders of 2015 convertible notes due recently made 5.75% annually and could have done even better had MannKind’s stock traded higher than $6.80.
Source: MannKind Corporation
5. Buy/sell options on a biotech stock• Aren’t options scary?! Actually,
they can help manage risk.• Call options allow you to
effectively control large numbers of shares at a relatively low cost – and a defined amount of risk.
• Options also give investors a way to profit no matter which direction the stock goes.
Source: Pixabay
A good example of a biotech option…• Think MannKind will go up by end of
year? Nervous about buying the stock since it’s down 47% in 12 months?
• Buying 100 shares would cost nearly $400. Buying a call with the option to buy 100 shares by Jan. 2016 at $4 per share would only cost ~$75.
• Defined risk. Lower cash outlay. But you can still profit nicely if MannKind’s shares climb.
Source: Wikimedia Commons
Fear not – but understand your risk
• Biotech ETFs and stocks can go down like any others.
• Small biotechs can go out of business, leaving convertible note holders in the lurch.
• Options can expire worthless.• But if you understand the risks,
biotech investing doesn’t have to be scary at all!
Source: Pixabay
Fear not – but understand the risks
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