Biotechnology is a very interesting industry to invest in, but also very complex. If you are looking for stocks that are most likely to see their value surge, then your best bet would be to start with biotech companies. The industry focuses on development of novel therapies and drugs that can treat various conditions, therefore if a company succeeds in releasing a marketable product or shows strong results in clinical trials, its stock will skyrocket. However, you should also keep in mind that most biotech companies have no profits and their revenues are often immaterial. There’s also a very high chance that the company you want to invest in will burn through all of its cash without having anything meaningful to show for it.
Conducting a traditional analysis of a company’s fundamentals is unlikely to yield any meaningful results, although they should not be overlooked, particularly if you are examining a small company that is more likely to run out of cash. However, you must pay more attention at what products the company is working on, the results of trials, estimates of the probability that the product will be approved by the FDA or other regulators. In addition, it won’t hurt to look at the disease that the drug or therapy aims to treat, how many people are suffering from it and what is the market potential of the product.
Therefore, analyzing a biotech stock can be a daunting task that requires a lot of research and a thorough understanding of the industry and the development process of a drug. To save you some time, we have selected a bunch of biotech stocks that the top biotech-focused hedge funds have invested in. The collective hedge fund sentiment towards a stock is an important metric that should be taken into account when looking for best companies to invest in. As our research has shown, stocks that smart money investors are collectively bullish on usually outperform their peers and the broader market.
Based on this research, Insider Monkey has developed an investment strategy that uses the hedge fund sentiment from the best-performing hedge funds and determines the best stocks to invest in. Since it was launched in May 2014, our strategy has returned over 74%, beating the S&P 500 ETF (SPY) by more than 20 percentage points. The stock picks from our strategy are shared in our premium quarterly newsletters that you can access free of charge for 14 days.
To identify the biotech stocks to invest in based on the sentiment of industry-focused hedge funds, we took into account five funds: OrbiMed Advisors, Julian Baker and Felix Baker’s Baker Bros Advisors, Christopher Medlock James‘s Partner Fund Management, James E. Flynn‘s Deerfield Management, and Peter Kolchinsky‘s RA Capital Management. These funds have equity portfolios in the billions of dollars and all of them invest solely in the healthcare sector, with the exception of Partner Fund, which has more than 70% allocated to the sector. The stocks that we selected have four of these funds holding long positions.
With this in mind, let’s proceed to the next page, where we will take a closer look at five stocks that top biotech-focused funds are bullish on.