Sunday, August 16

Week 215 - “Buy-and-hold” Barron’s 500 Biotechnology Stocks

Situation: All asset classes are currently high-priced, and biotechnology stocks are the highest priced. If earnings reports don’t surprise on the upside, they’re over-priced and a bubble may be forming. Most companies use borrowed money for approximately half their capital needs, which means they have little in the way of tangible book value. Remember: Assets = Liabilities + Equity. To “make serious money,” you’ll need to focus on asset classes that have strong growth prospects and modest indebtedness. That means technology stocks should be ~10% of your retirement savings. Currently, biotechnology stocks have the best growth prospects, and it is in your best interest to have stock in one or two of those companies. Given that retirement savings should be composed of “buy-and-hold” stocks and bonds, you’ll want a list of candidate biotechnology stocks to choose from. Is there any such thing as a buy-and-hold biotechnology stock?

Mission: Create a spreadsheet of candidate “buy-and-hold” biotechnology stocks from the recently published 2015 Barron’s 500 List.

Execution: This hasn’t been easy but we’ve managed to come up with the names of 7 candidate companies (see Table). Two are “plain vanilla” biotechnology companies: Gilead Sciences (GILD) and Amgen (AMGN). Two are agriculture companies that produce genetically-modified seeds: Monsanto (MON) and duPont (DD). Three are traditional pharmaceutical companies that have sizeable biotechnology divisions: Johnson & Johnson (JNJ), Eli Lilly (LLY), and Bristol-Myers Squibb (BMY). Columns W-Y of the Table contain long-term statistical data available at the BMW Method website (see Week 193). That website lists AMGN and LLY as being “potentially overpriced”, along with the NASDAQ Biotechnology Index. 

Bottom Line: The NASDAQ Biotechnology Index at Line 14 in the Table has the big picture. Returns for these stocks are 3 times higher than for the S&P 500 Index over the past 16 yrs (see Column W) but our enthusiasm is dampened by the BMW Method projection of a 53% loss in a future Bear Market vs. a 32% loss for the S&P 500 index. Six of our 7 “buy-and-hold” candidates are speculative by most measures (see Table); only Johnson & Johnson (JNJ) appears to be a better bet than simply putting your money to work in a bond-hedged S&P 500 Index fund (VBINX).

Risk Rating: 7

Full Disclosure: I dollar-average into JNJ, and also own stock in MON and DD.

Note: Metrics in the Table that are highlighted in red denote underperformance vs. our key benchmark (VBINX); metrics are brought current for the Sunday of publication.

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