Yelian Garcia Details Mistakes Investors Make When Investing in Biotechnology Companies
The biotech industry has seen mixed results in the stock market over the last decade. From soaring stock prices between 2013 and 2015 to stocks bottoming out in 2016, 2017. Investors who got their fingers burned by the stock fall are now gun shy when it comes to biotech stocks. If seasoned investors are wary about investing in biotech companies, what should amateur investors do? Should they sit it out until the next great biotech bull run?
Hardly, says Yelian Garcia an international finance and global affairs professional with a Chartered Investment Management designation from the Canadian Securities Institute. Yelian, who is also a Derivative Market Strategist currently enrolled in the International MBA program at the Schulich School of Business, offers some insights on the kind of mistakes novice investors should avoid when investing in biotech companies.
1. Investing in One-Trick Ponies
Investors sometimes make the mistake of picking a biotech stock because the company has a blockbuster drug bringing in billions in royalties. This is a tricky situation because such companies have all this revenue hanging by a thread — a very slender patent thread. When such a drug’s patents lapse, revenues could fall precipitously, followed by stock prices.
To avoid this trap, investors should look for biotech companies that have a strong pipeline of drugs. Such companies typically have a handful of drugs in stage II clinical trials, with strong indications that they could move to stage III and approval.
2. Investing for Speculative Purposes
Speculative investing can prove pointless when it comes to biotech stocks, says Yelian Garcia. Why? Because most biotech stocks rise and fall based on results from clinical trials. If these trials take years, then a biotech’s stocks could remain unmoved for that period. If you invest hoping to profit from fluctuating prices, you may end up sitting around for a while waiting for prices to move.
What’s more, price movements may be so small; broker fees may very well consume any gains made. To avoid this mistake, it is important to understand that most seasoned investors invest in biotech stocks for the long-term value they yield, not the short-term gains from price fluctuations. Exits via acquisitions are another way investors benefit from biotech stocks.
3. Trying to Time the Market
Timing the market involves using various technical indicators to predict where the market will move. When it comes to biotech companies, technical analysis does not work very well. This is the case because biotech companies do not follow normal organizational cycles like quarterly sales forecasts, contract renewals, and so on.
Instead, they follow a haphazard trend that’s informed by the drugs the company has in its pipeline and what the FDA and other stakeholders think of it. In a way, it’s like playing roulette, Yelian Garcia points out, you never know where the stock price will stop. As such, professional investors don’t try to time the market when trading in biotech stocks; they focus more on the analysis of each company’s fundamentals.
4. Betting on A Wildcard Cure
Investing in biotech can sometimes take an idealistic turn. When you hear of a company that’s working on a cure for cancer, it may sound like that once in a lifetime opportunity to get in while you can. CRISPR-Cas9 is one such technology that promises to cure a host of ailments, at a gene level.
It may seem like investing in biotech companies working on the technology is a good bet. But, each company, despite what it is working on, has its own unique fundamentals. Also, such a technology is still far from commercialization, so investing in surer bets may offer a better chance of getting a decent return on investment.
5. Losing Patience
Biotech investments are a long play. Investors going in long on a biotech stock know they may need to hold the stock for years before getting a return. The mistake some investors make is to get impatient and jump from one biotech stock to another, riding on media speculations. This is often detrimental to the investor because speculation and facts do not always align.
The reality is that it takes time for new drugs to be created, tested, approved, and brought to market. By allowing the company time, there’s every chance there could be a blockbuster drug in the pipeline that makes it to market and bolsters the stock price to bring significant returns.
6. Failing to Diversify
Investing in biotech stock can be frustrating, warns Yelian Garcia — especially if the stocks you pick don’t seem to have any returns. Instead of bouncing from one biotech stock to another, opt instead to diversifying your biotech stock portfolio. Try balancing stocks in oncology with those in diabetes and other niche areas.
Also, try and balance out blockbuster drug companies with smaller, more niche drug companies that may not be global giants. By balancing out your portfolio in this way, you can hedge your risks in case one biotech company’s trials fall through. The chances that you will land a company with a drug that gets approved are significantly improved when you diversify your biotech stock portfolio.
7. Investing on a Hunch
Some investors make the mistake of investing on a gut feeling or hunch. They read about a company, maybe talk to a relative, read a few more stories and they get this gut feeling that it is the right stock to buy. When it comes to biotech stocks or any stock for that matter, this is a poor strategy.
The problem with hunches is they are hardly ever data driven. They rely on erroneous intuition and can result in massive losses. To avoid this mistake, try to be as dispassionate about trading as you possibly can. Remove all emotionality and focus on the facts you have available.
Biotech stocks are a unique set of stocks because they are so unpredictable, Yelian Garcia advises. Investing in them is almost like taking a gamble — a gamble on the success of whatever drug the company is working on. If you are ready to ride this roller-coaster ride, then biotech stocks are a good bet. As you do so, remember to avoid the mistakes outlined in this article so you can protect your investment and make a return at some point.
Find out more about Yelian Garcia here.