Daily Stock Pick: November 16th, 2022

Stocks sank in early trading, giving back some of the recent gains.  In the last week, the S&P 500 has risen nearly 7%, and all major averages are on track for a positive month, but some investors say a near-term retreat is on the horizon.  “In the short term, the market is very extended and overdue to pull back and digest the recent rally,” said Adam Sarhan, CEO of 50 Park Investments.   

One area of the market where stocks can be found to produce 10x, even 20x returns, regardless of what’s happening elsewhere, is biotech.  Looking at the performance of the past ten years, if the biotechnology industry were a sector, it would be the best-performing one.  Over the past decade, biotech stocks have returned 524%.  That beats every last sector, it beats the broader healthcare sector by 200 percentage points, and it’s nearly double the S&P 500’s total return in that same time frame.  

There’s clearly money to be made in the discovery of new treatments for anything from the flu to cancer.  But biotech stocks carry substantial risk.  While positive data from a drug trial could send their stocks soaring, a setback or failure can crush their returns, making them difficult buy-and-hold investments.  

For those looking for a long-term investment in biotech with less risk, biotech ETFs offer an answer.  Instead of betting on individual drugs or companies, an ETF allows you to spread risk across dozens or even hundreds of firms simultaneously.  

The Principal Healthcare Innovators ETF (BTEC) is a promising fund geared toward finding smaller, innovative companies that might get overlooked, with a focus on active investment in early-stage R&D.

BTEC seeks out healthcare firms from the Nasdaq US Benchmark Index but excludes the top 150 securities by market size while also excluding companies with low trading liquidity.  How it identifies “innovators,” however, might seem a little unorthodox: Specifically, it seeks out “non-earners by means of having negative earnings over the prior 4, prior 8 or future 4 quarters at least half of the time.”  In other words, it selects companies with inconsistent or negative profits, the idea being that, for now, they’re pouring every last cent into R&D.

BTEC then picks the best-ranked 150 to 200 companies based on its scoring measures, then weights those stocks by size, with no stock exceeding 3% in rebalancing, which happens twice a year.  At the moment, Alnylam Pharmaceuticals (ALNY) is the top holding at 4.3% of assets by virtue of its gains since the last rebalancing.  BTEC also holds Seattle Genetics (SGEN), BioMarin Pharmaceutical (BMRN), and Exact Sciences (EXAS), among others.  

  • Net Assets — $56.78 million
  • Yield — 1.32%
  • Expense Ratio — 0.42%