When most people hear "venture capital," they think of Silicon Valley...
They think of men in $5,000 suits trying to predict the next Apple or Facebook. But the concept of venture-capital investing goes back to more than 75 years to one of America's blue-blood families.
Laurance Rockefeller, grandson of Standard Oil founder John D. Rockefeller, Sr., developed the strategy to grow his family's wealth.
Rockefeller began his career in finance at 26, when he inherited his grandfather's seat on the New York Stock Exchange. During World War II, he became fascinated with incredible developments in science, technology, and medicine.
It shouldn't surprise you that the stocks I recommend in my biotech newsletter come from a few key sectors... And they look a lot like the emerging technologies that Rockefeller focused on.
We use a few basic clues to identify the winning stocks in these areas. As you'll see, these traits amount to something important – a clear path to beating the competition.
Let me explain...
First of all, we focus on three main types of companies: small drug companies, medical-device makers, and new high-tech devices.
We love developing-drug stocks for several reasons. First, safe drugs save lives, so demand is inelastic. This means revenues go up even as prices rise.
Second, over the next 20 to 30 years, the older segment of our population is going to explode. And aging baby boomers will continue to spend a fortune on everything from pharmaceuticals to lifesaving devices.
Third, new drugs are protected monopolies. Patent-holders are guaranteed exclusive rights to sell a new drug for years before a generic version can hit the market and undercut profits.
Plus, all the competition has to undergo testing before it can be released. So there are no surprises about new players coming in the field. You can't build a new drug in your garage. Not if you want FDA approval to sell it legally...
Medical devices are a similar story. Patents give economic monopolies to the companies that sell these products. And they make the competitive landscape relatively easy to read.
In medical sectors, we look for patented lifesaving drugs. We also look for devices with strong positive effects in human trials – and with low side-effect burdens to protect against future competition.
When you get outside of the medical realm... new technologies do not usually address lifesaving needs. But there can still be a regulatory requirement that guarantees a technology will be put into use. Imagine who the winners will be if the U.S. National Highway Traffic Safety Administration mandates lane-departure warning technology, just like it did with seat belts or air bags.
That's why we look for companies with breakthrough technologies that can readily be adopted by the market. In other words, consumers need them, and they're willing to pay a lot of money for them.
When investing in all these types of companies, a deep understanding of the companies' patents will be key. These patents (and related forms of protection of intellectual property) are how we know a company's innovations are protected... that the folks designing these breakthroughs will be the ones to bring them to market. That way, we can be more comfortable investing alongside them.
Patents are the bread and butter of successful biotech investing. Operating businesses are afraid to discuss them, so Wall Street doesn't seem to understand their value.
The trick is, a patent is grounded in science, medicine, or engineering. It's not a financial instrument. And it's only valuable if it addresses a need – like an antibiotic that fights infections.
One way or another, we want to secure our stake in the asset that a future market will desire. So we're doing more than just buying stocks in Stansberry Venture Technology. We also want to understand the patents and their timelines.
One sector you won't see us ranging into often is software. Think about a smartphone application that can order you up a private-car service, like Uber or Lyft. Nothing holds back competition, so there's no guarantee who will win. Will Lyft beat Uber, or will Uber beat Lyft in the ride-hailing space? Trying to guess is a fool's errand. For that matter, a third company might come along and wipe out both.
That's not true of safe new drugs, or devices, or core revolutions in hardware technology... like new classes of computer chips. Although such technologies are much more expensive to develop, they are not fads. And their intellectual property is much harder to steal.
This is why some venture capitalists are now holding on to early stage drugs, too... At least, they are trying to. But human clinical trials are so expensive, these small drug companies almost have to go public to share the risk.
We are happy with risk, as long as the reward is greater, and we have a reasonable chance to make far more money than we put at risk.
That's the core of what we do in my Venture Technology newsletter... We share a common understanding with early stage venture capitalists. We give up some of the reward, but we also retire most of the risk... Plus, we stay more liquid.
This is how we find "no contest" companies in emerging technologies – the kind that can soar to spectacular gains. And it's how you can learn to invest like a Rockefeller.
Editor's note: Up to 70% of the U.S. population could soon be prescribed a revolutionary medication. It could alter the lives of 2 billion people around the world. And Dave says it's about to reach a regulatory turning point that could send this small stock skyrocketing... potentially as much as 2,000% in the coming years. Get the details from him before this story goes offline.
"Not a single advance in biotech is cut off from science and engineering," Dave writes. And knowing the up-and-coming scientific developments can give you a major edge as an investor... For the full story on what to look for in tiny biotech stocks, read more here: The 'Magic' Behind Every Successful Blockbuster Drug.
Dave recently wrote a two-part essay about COVID-19 and the various medical findings that doctors are using to combat it in real-time. If you missed them the first time around, be sure to check them out here and here.
Today’s chart looks at a biosciences stock that will benefit as the population ages…
Longtime readers know that our colleague Dr. David Eifrig is bullish on the health care sector. There are an estimated 73 million Baby Boomers in the U.S., and by 2030, all will be at least age 65. This “silver tsunami” is going to need more and more medical care and tests as they grow older. And today’s company can help out with those medical needs…
Castle Biosciences (CSTL) is a $1 billion maker of skin-cancer tests. According to the American Cancer Society, the risk for melanoma increases as folks age… And the World Health Organization labels non-melanoma skin cancer as one of the most common cancers in the world. Castle Biosciences has tests for types in both categories. And it recently announced its new test for high-risk cutaneous squamous cell carcinoma is becoming available commercially.
As you can see, CSTL shares are up 116% in the past year. Shares recently hit new highs since going public last year. As the Boomer generation ages, they’ll need more medical testing, which will be a tailwind for Castle Biosciences’ future…