Biotech Stocks, Medical Device Stocks, Big Pharma and Medical Real Estate offer promising returns in 2019. Invest successfully in January and watch your money grow all year long….
So you’ve got some money to play with, and you want to make it grow. Maybe it’s $10,000 from a juicy Christmas bonus, or a wedding gift, or your Great Aunt Jenny remembered you in her will. At any rate, you should already be patting yourself on the back. If you have made it through the treacherous holiday season without spending your capital, you are already ahead of 95% of Americans. Clearly you understand that financial freedom feels better than anything else you could have bought with your windfall, and you are ready to invest that money today to yield a bright future tomorrow.
But how??? Now may be when the butterflies set in. So many different stocks out there!!! Should you invest in Apple? Or Ford? Or that Chinese internet company your cousin told you about? Once again you can give yourself a pat on the back; if you are already reading my blog, something has told you that Healthcare is generally a great place to invest. Just remember, 10,000 Baby Boomers per day turn 65 in America. Most will live for decades to come. Big Pharma ain’t goin’ anywhere.
But even within healthcare, there are so many options!!! Should you invest in a household name like Pfizer? What about that high flying biotech that you saw profiled on CNBC’s FAST MONEY? What about CVS, they seem to be grabbing headlines lately….
The simple answer is……IT DEPENDS. Where you should invest depends a lot on your own personal goals, tolerance for risk, and timeline. What follows are suggestions depending on general preferences and common tendencies that I see out in the world of investors. If you see yourself fitting any of these scenarios, then these may be solid suggestions for you. Remember, these are JUST ideas. Ultimately, YOU must do the research and look out for YOU. The sooner you learn to rely on your own research skills and your own killer instinct, the sooner you will achieve the satisfaction of financial independence.
IF YOU THINK A RECESSION IS COMING
Starting to get that 2008 feeling in your stomach? Let’s face it, this record bull market has been flying high for so long, eventually something is bound to bring it down. Some pundits have suggested that a combination of trade war, record corporate debt levels, and constant political histrionics may finally induce a bear market that has been a long time in coming. Truth be told, whoever your favorite political or socioeconomic boogeyman is, no stock market goes up forever. Nothing dramatic would be required for the tide to finally change, and stocks to head down for a while. Maybe way down. Does that mean that you shouldn’t invest at all??
If you are doing it right, it shouldn’t matter. Don’t invest any funds that you will need in the next five years. However, assuming that you are a long term investor with the proper long term time horizon, study after study have shown that what really matters is time IN the market, not timing the market. That being said, if you know it’s about to rain, it’s good to put on a raincoat.
The healthcare sector is one of the most staunch providers of DEFENSIVE stocks, or companies that tend to weather economic storms. Do you know how many major pharmaceutical companies went bankrupt during the Great Recession of 2008?
Zero. That is right, 0. With Wall Street big shots jumping out of windows and General Motors begging to be propped up by the Federal Government, companies like Pfizer ($PFE), Merck ($MRK) and Eli Lilly ($LILY) just kept pumping out reliable cash flow and profit, quarter after quarter, year after year. In fact, $10,000 invested in Pfizer in January of 2009 would be $27,351 today, despite all of the trials and tribulations of the Great Recession. Merk ($MRK) would be $24,615. If Big Pharma could pump out these kinds of returns during one of the worst economic episodes of the last hundred years, you can probably feel safe enough putting your money with them now.
Another great place to invest if you feel that the Raging Bull may be about to face castration is HealthCare Real Estate, or REITS. As you may remember REITS are special, publicly traded corporations that are required by law to pay out most earnings and cash flow in the form of dividends. This approach has a few big benefits when the general stock market swoons.
First of all, because REITS must constantly pay out earnings, it’s hard to fake those earnings. During times of stock market trauma, there are always a lot of charlatans that are finally exposed (If you aren’t old enough to remember ENRON, consult Dr. Google). Most of these massive corporate frauds are enabled by the fact that many major corporations RETAIN earnings. So, if Enron “made” $100, they would “reinvest” $90 of that, which allowed them to create an elaborate world of fraudulent accounting. With REITs, it’s the exact opposite. If a REIT makes $100, by law, the REIT MUST pay out $90. Ultimately, they make the cash flow and pay it out, or they don’t. This tends to keep execs honest.
Healthcare REITS are particularly good during a recession because they address a vital, fundamental need. Remember those 10,000 Baby Boomers turning 65? I said they would live for decades; I didn’t say they would live WELL for decades. The reality is that our population of frail elderly people is increasing dramatically be the day in America, and we have to put them somewhere. My 98 year old Grandma will pass away whenever God calls her home; Our Lord doesn’t seem overly concerned about timing this event to the ups and downs of the stock market. Healthcare Real Estate serves a fixed demand. We just have to put Grandma somewhere. We may put her somewhere more fancy, or less fancy, depending on the family’s finances, but the need is still the need.
Lastly, Healthcare REITs do offer a safe shelter in a recession because they mostly depend on dividend yield to provide return to investors. In other words, even if the stock price falls with the rest of the crashing market, these entities can be counted on to keep pumping out higher than average dividends come hell or high water. Dividend cuts are not impossible, but the execs running these places are more likely to live on bread and water before cutting dividends.
Some solid names in the space are VENTAS ($VTR), ($HCP), Welltower ($WELL).
IF YOU LIKE A GOOD BARGAIN
You did your Christmas shopping this year on December 26th, because that’s when the good sales are. Ten percent off is for losers. Goodwill isn’t just a place to pick up cheap clothes; it’s a religion. If you agree with any of these statements, you are probably a value shopper. I know of few investing thrills bigger than purchasing $1 in value for just $.50.
Of course the risk to this approach is that, sometimes stocks are on deep discount for a reason. Sometimes stocks have merely fallen out of favor like bell bottoms in 1984. Other times stocks do have real problems, but they can be fixed. Sadly, some deeply discounted companies are just in a death spiral. We typically aim for categories one or two; occasionally we get stuck with a turkey. If you don’t mind going through some discomfort to score the deals and steals, here are a few ideas for you.
Poor Teva ($TEVA). As the world’s largest maker of generic pharmaceuticals, she was the bell of the ball for many years. She gobbled up rival after rival, and even successfully dipped her toes into the rarefied world of branded drugs. But management got arrogant, made a few big, dumb moves (like borrowing massive quantities of money to buy a bad company). Then prices for generic drugs started to move the wrong way in the United States. Next thing you know, the old girl’s share price plummets from $70 to as low as $10. Ouch.
This may one of those great investment opportunities where the baby was thrown out with the bathwater. First, $TEVA still makes money. Lots and lots of money. Second, the Board has removed the poor management that was responsible for plunging the company deeply into debt, and successfully attracted new CEO Kare Schultz, an outsider from Teva’s insular culture with a reputation for turning around troubled giants. Lastly, $TEVA is Israel’s national champion. In a worst case scenario (which has not materialized), it’s very unlikely that Israel’s socialist leaning government would ever let $TEVA go under. The fact tiny Israel could found and grow a multinational all the way to international prominence is a point of pride; bankruptcy was probably never on the table.
$TEVA is now using it’s still prodigious cash flow to furiously pay down debt. The generic pharmaceutical market certainly isn’t going anywhere due to very favorable global demographics underpinning the business. And $TEVA even has attracted a premium shareholder; Mr. Warren Buffett, the most famous value investor who ever lived. Good enough for Uncle Warren, good enough for me.
Another former Cool Kid now on the outs is Gilead Sciences ($GILD). Gilead made its name by pioneering the first effective HIV treatments, and drew further praise and adoration for curing Hepatitis C.
But lately $GILD has failed to placate Wall Street analysts who demand that the company keep pulling rabbits out of hats. The Hepatitis C franchise has attracted competition, driving down prices (this is a great thing, by the way. Every once in a while, Capitalism works). The result has been revenue numbers heading in the wrong direction, causing many episodes of fear and loathing across Wall Street. $GILD shareholders have been punished; shares today sell for about half of what they commanded just a few years ago.
I believe that $GILD is the equivalent of a sheik Dolce & Gabbana dress left for dead in a Beverly Hills thrift shop. Much like $TEVA, this company still makes money; oceans of money. Unlike $TEVA, $GILD sports a muscular balance sheet with little debt and plenty of cash. And the company has already begun focusing its efforts on building a new blockbuster franchise in cancer immunotherapy. $GILD has lately attracted a new CEO from Roche, and Roche knows a thing or two about turning cancer into a goldmine. Even if it takes years for $GILD’s share price to return to its former glory, the company still pays out a sexy 3.5% dividend with its still ample cash flow. This name could be a diamond in the rough.
If you really aren’t afraid to plumb the bottom of the bargain bin, General Electric awaits gutsy investors like you. $GE’s nightmarish fall from grace is quickly becoming the cautionary tale for MBA students across America. At the hands of entrenched corporate management and an ossified corporate culture, the former pride of American industry suffered from terrible M&A, constant financial mismanagement, and dubious accounting. During one of the greatest Bull Markets in history, $GE’s shares have descended to the 9th level of investor hell, falling from $30 to $8 or lower in just the last five years. The once bounteous dividend has been slashed in an attempt to keep the fumbling giant solvent.
But there may be light at the end of the tunnel. The GE Board decided not to waste a good crisis, and GE’s Old Regime was unceremoniously fired. The new CEO is $GE’s first outside CEO in one hundred years. Mr. Larry Culp has been called in to perform emergency corporate surgery, and amputation is one of the techniques that he is moving forward.
Not all of $GE’s vast corporate empire is rotten. In fact, GE Healthcare has reliably pumped out billions in profits, year after year. So, “Dr” Culp is going to spin off GE Healthcare, with the hope that the new stand alone unit will soar once unencumbered by its earthbound corporate parent.
The bold value investor strikes before the opportunity is obvious to everyone. You could wait six months and simply buy shares of the newly independent GE Healthcare. That is the less risky move. But if you purchase shares of $GE now, you may wind up with a “Buy one, get one” deal. WIth luck, you will eventually own shares in a restored industrial company, and a newly liberated medical equipment dynamo. Who doesn’t love a BOGO?
IF YOU LIKE ROLLERCOASTERS, HOTSAUCE, AND VEGAS…
Those who follow my writing know that I really don’t like to use the term “gamble” for investing. Gambling is a game of pure chance, and usually rigged in favor of the House. That being said, the world of biotechnology small cap stocks is legendary for outsized risks and outsized returns. All you can lose is what you put in. Potential payoffs can be five, ten, or even twenty times what you invest. If you have some money that you could afford to lose, these would be decent bets on bold new technologies.
Neurotrope Inc is a tiny group of ballsy scientists trying to cure Alzheimer’s. Anyone with any familiarity in this field knows a few facts. First, any treatment at all that can be proven effective against Alzheimer’s has mind boggling financial potential; according to the NIH, about 5.5 million Americans currently suffer from the devastating disease with no help in site. This number is set to grow exponentially as the Grey Tsunami engulfs the world. Second, the reason why there are currently no effective treatments is not through lack of trying; in fact many dozens of compounds have failed with many billions of dollars incinerated in the process. If $NTRP really cures or even lessens Alzheimer’s, the team is going to be very rich; since it’s a public company, you can be too.
$NTRP has already published some promising data from a small phase 2 trial for it’s compound Bryostatin-1. The company is currently mounting a larger confirmatory phase 2 trial. Results should be published sometime in 2019. If Bryostatin-1 is proven effective against Alzheimer’s, the shares could skyrocket five or even ten fold. If not, well, better luck next time…..
Unless you have been living under a rock, you have probably heard of CRISPR. This is a new technique to edit DNA itself, allowing scientists to essentially alter the instruction manual that guides protein formation in living mammals. The technique recently made headlines when a rogue Chinese scientist claimed to have edited human twins using the technique.
Two companies that seek to capitalize on this giant leap in genome technology are CRISPR Therapeutics ($CRSP) and Editas Medicine ($EDIT). Both are slightly more credible than shady chinese scientists creating baby frankensteins from the shadows. Emphasis on slightly!!! These companies are fraught with risk, but at valuations of roughly $1 to $2 billion each, many would say the current valuations are reasonable for embryonic technologies of such high potential. Because they are public companies, investors should at least benefit from more transparency than would generally be available for such a young technology.
The big risk here is that neither company is truly “clinical stage,” meaning these folks won’t even have a viable medicine to sell for many years. An additional risk is that, while both companies count well known scientific luminaries amongst their leadership, someone is going to lose this race. Remember MySpace vs Facebook? Do you remember Yahoo vs Google? If those are the kind of risks that you like to take, one, or both, of these companies make sense as an investment for you.
The first step towards becoming a successful investor in 2019 is to get to know your own tolerance for risks, and to learn about what investment techniques fit you best. If you choose to invest in biotech stocks, or to own a piece of Big Pharma, you will gain knowledge that will pay dividends for years to come. Happy New Year and best of luck….
DISCLOSURE: The Sick Economist owns shares in $GE, $GILD, $NTRP, $MRK, and $LILLY, $VENTAS and $HCP.