A Rare Setup in the Market's 'Exception' Stocks

Editor's note: Biotech stocks took a hit last year. Some are still being unfairly punished today. And according to Joel Litman – founder of our corporate affiliate Altimetry – that's setting up an atypical situation... and a rare buying opportunity. In this article, adapted from yesterday's issue of the free Altimetry Daily Authority e-letter, Joel details how to take advantage of the market's "exception" in this boom-and-bust sector...

Most companies wait until they're making money before tapping the public market for cash...

Public-market investors just don't have the patience for startups that are a ways off from being profitable. And they're certainly not OK with risking dozens of failures for every one success story.

But there's one corner of the market that's the exception to this investing rule...

I'm talking about biotech.

Biotech companies take "capital intensive" to an extreme. They funnel cash into labs to develop potential drug therapies. Then they pay tens – or sometimes hundreds – of millions of dollars to take those compounds through trials.

Even after all that, 75% of drugs that get through Phase I clinical trials still fail.

And if a treatment gets approved by the U.S. Food and Drug Administration and other regulators, the company has to make the drug at scale. That takes even more spending on a ton of equipment.

Because of those capital needs, biotech companies have to tap the deeper public equity markets sooner than most startups.

These companies can soar when things go right... So public investors are willing to take that bet. And as I'll explain today, we're now seeing a biotech opportunity so rare, it only comes around once or twice in a lifetime.

Even under "normal" circumstances, the right biotech investment can lead to gains that are practically unheard of...

Consider Biogen (BIIB), a pioneer in treatments for diseases like Alzheimer's and spinal muscular atrophy. Shares are up more than 29,000% over the past 30 years.

Gilead Sciences (GILD), which marketed one of the first hepatitis C cures, is up around 21,500% since 1994.

And Amgen (AMGN), whose top product treats postmenopausal osteoporosis, is up more than 210,000% since the 1980s.

This kind of upside potential means lofty valuations for most biotech startups.

Investors want in – even when those companies might be a decade away from actual revenue if everything goes right. That's what makes today's opportunity so special...

There are more than 500 biotech microcaps – meaning those with market caps below $2 billion. And right now, more than a fifth of them are trading for less than enterprise value ("EV"), or the value of the cash on their balance sheets.

These are what we refer to as "negative EV" companies. And even for biotechs this far away from making a profit, it's rare to see so many trading for negative EV.

For many of these companies, the setup is probably justified. More biotech startups should trade at those valuations all the time. With interest rates high and the capital markets closed to unprofitable businesses, they'll struggle to access capital in the coming months.

However, not all negative-EV biotechs deserve that designation...

Some of these stocks have been unfairly dragged down. Investors aren't taking the time to figure out which companies have real promise to deliver a drug... or which might not even need financing as long as rates stay high.

My team and I have spent weeks tracking this setup...

We pored over the 115 biotech stocks that appeared to be negative-EV at first glance. And we found that only 51 actually qualified as negative-EV.

That's when the real work started. We distilled those 51 potential biotech blockbusters down to a list of five "buys" today... plus another eight that could be promising in the near future.

And in the process, we also "sounded the alarm" on five dangerous biotechs that could wreck an unsuspecting investor's portfolio.

I don't expect this opportunity to last much longer. Some of the stocks I tracked during my research soared hundreds of percent in weeks... days... and even a single trading day.

So if you want to learn more about what we're seeing, I urge you to watch the free replay of my presentation, in full, right here.

Setups like these don't come around often. Be sure to take advantage of them when they do.


Joel Litman

Editor's note: Stansberry Research founder Porter Stansberry recently sat down with Joel to break down the historic anomaly that's disrupting the biotech sector. This kind of event only happens once or twice in a lifetime... and could deliver staggering gains to those who know how to position themselves correctly. But this window of opportunity won't last long... Click here to learn the details.

Further Reading

Biotech companies used to be able to raise cash instantly. That's no longer the case today. Even still, committed firms aren't shying away from investing in this industry – and now, signs are pointing to a rebound in this space... Read more here.

Japan's economy is short on young workers. But with the help of robots and AI "avatars," the country is combatting these setbacks. We'll likely see more automation as workforces age around the world. And one company stands to benefit... Learn more here.