We’re a quarter of the way through 2014 and everything has plateaued.
The stock market is moving sideways, stocks are overvalued, and earnings can’t justify current valuation.
Corporations are opting to take on debt to finance share buybacks, which they will have to inevitably roll into higher priced loans.
EBITDA margins (earnings before interest, tax, depreciation, and amortization divided by total revenue) are way off their 2007 peaks and trending down.
The irrational exuberance of 2013 led to calls for another banner year in 2014. Now reality is setting in and good investments are scarce.
In this kind of climate, it is often best to find under-appreciated and largely ignored sectors, and I’ve certainly been a fan of it in recent months.
Calling for a return to gold miners at the end of November as the MSM continued to mock the sector and herald the end of a commodity supercycle was spot on.
Even after the recent slump, the Market Vectors Gold Miners ETF (NYSEARCA: GDX) is still up 9% and the Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ) is up about 15.5%.
The individual miners I highlighted look even better with one exception: Kinross took a beating in March.
Exposure to Russian gold mines and difficulty getting their balance sheet in order caused the decline, but all signs point to share prices matching or beating the performance of the S&P 500 within a couple weeks or months.
The combined gain for the four companies I mentioned is a market-busting 26.47%. Here is a look at their performance since I published the article:
I still see a lot of potential for gold and precious metal miners in the long-term, but for now we need one of two things to justify further gains: higher gold prices or widespread realization of the historic flow of wealth from West to East.
I think it is time we start searching elsewhere for untapped potential. The next sector I’m looking at bucks my contrarian investing trend. In fact, it is one of the most watched sectors today.
A recent 13% pull back in the biotech sector has some people questioning if a bubble is starting to implode.
To put it bluntly, they are dead wrong. It was a minor setback for a two-and-a-half year run that still has a whole lot further to go.
Doubling Revenue, Tripling Cash Flow
Even after the pullback, biotech stocks are still up around 200% since they started breaking away from the rest of the market in August 2011. Over the same time period, the S&P 500 is up around 70%.
Anyone looking at the sector as a whole and getting nervous about a bubble is making a mistake.
Every company has its own expertise, development cycles and potential returns. Biotech stocks simply cannot be evaluated like “normal” stocks.
Biotech companies with promising medical devices or pharmaceuticals in the pipeline can bleed money until their products come to market, which can take up to a decade. Once the product comes to the market, all of the pent up potential explodes, along with share prices.
Will all of the small companies focusing on a single product succeed? Of course not, but the ones that do will do exceedingly well.
As far as I’m concerned, the best way to gauge the biotech sector is to focus on the big players.
Large-cap biotech companies — including Amgen, Celgene, and Gilead — are trading at 13.5x 2016 earnings and 11.7x 2017 earnings, which is actually cheaper than the 14.2x and 13.5x for the S&P 500.
These are the companies that will either buy tiny biotech firms with promising drugs or provide a massive source of revenue for small companies with innovative products they need.
To make things even better, there is a whole lot of value that will be unlocked in the major biotech companies over the next several years.
Morgan Stanley recently released a note to clients from two of its well-respected analysts (one is a former heart surgeon) illustrating the potential (emphasis added):
“Major de-risking events leading to new mega blockbusters have transformed the Big 4 Biotechs (Amgen, Biogen, Celgene and Gilead). We expect total group revenues to double from $175B over the last 5 years to $335B over the next 5 years and total cash flows to triple from $31B to $95B.”
And where will that revenue and cash flow end up? Right back into promising mid- to late-term internal projects and into more buyouts.
The Best Way to Profit
Ultimately, the big four biotech companies will continue to drive biotech higher and higher for years to come. The only question is how to play the situation as an investor.
Amgen, Biogen, Celgene, and Gilead will all have strong potential with little downside, but the real way to profit from the massive revenue and cash flow growth is to get your chunk of their money.
That means getting into the most promising small biotech firms. Unfortunately, it also means doing a whole lot of research into exactly what the individual companies are going to bring to the market.
Once again, small drug makers bleed cash and can wait years for FDA approval. Plenty of them may get held up and fold simply because they can’t pull in the funds needed to survive long enough.
A novel and potentially obscenely profitable way to get the best of both worlds is to stick to small companies with incredible products that the major biotech firms need.
Instead of slogging through bureaucratic delays and long-term studies, these companies can start pulling in a whole lot of revenue as soon as they can scale up production.
Nick recently uncovered a perfect play for this style of biotech investing. This small company holds a patent for the only known way to ramp up production of an increasingly scarce molecule that cannot be synthesized.
Considering this molecule is absolutely critical to developing and testing the latest generation of anti-cancer, Alzheimer’s, arthritis, and heart disease drugs, Big Pharma desperately needs to secure a steady supply as soon as possible.
For now, this company is still under the radar while negotiating lucrative deals with some of the big biotech companies mentioned earlier. Once these deals are announced, the window for getting in early will be closed.
To find out more about this company, check out Nick Hodge’s Early Advantage.
