How to Find the Best Biotech Stocks

Finding homerun-hitting biotech stocks can be a challenge for any investor, so we interviewed one of the best in the business.

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Have you ever wondered how to find great biotech stocks in a sea of hopeful but high-risk medical small caps? I interviewed John McCamant, the editor of a top-performing investment newsletter that’s all about finding the best biotech stocks. So if you’d like to add a little high-potential punch to your portfolio, read on for John’s tips on finding biotech stocks that will turn into big winners.

Chloe Lutts: Hi John, thanks for taking the time to talk to us today. Your newsletter, the Medical Technology Stock Letter is a consistent performer: to what do you credit your success?

John McCamant: A combination of experience and a good market environment can go a long way. We have a combined 50+ years in the business, which allows us to identify specific opportunities that others with less experience may not recognize.

CL: That’s a lot of experience. How long has the Medical Technology Stock Letter been published? Has biotech investing changed a lot since then? Is the industry still a good place to invest?

JM: MTSL was started in December of 1983 by my father Jim McCamant, just after the first group of biotech companies came public, including Amgen, Cetus, Chiron and Genentech. Biotech investing remains quite similar, with the caveat that the industry is much more mature. The drivers of value remain the same, in that a positive clinical trial or a lucrative partnership can add value to a biotech stock whether it’s 1989 or 2012.

I would argue that the industry has never been better for investment. The primary reason is that the industry has matured, and if you look to the high tech industry as an example, you see that it took almost 25 years (1960-1985) from its inception before it became a major industry. We believe that biotech is at that inflection point right now with our greatest growth in the future.

CL: What’s your investing philosophy? What do you look for in a biotech stock candidate for the newsletter?

JM: Our investment philosophy is to find the best managed biotech companies with the best drug development candidates. We focus on management’s experience and ability to execute. We always want both good leadership and exciting drug development candidates. In our experience, we believe that excellent management is the key in biotech investing as the nature of drug development is a high failure rate. Thus at the end of the day, you want a CEO and management team that can take the drug failures and still keep creating value for their shareholders. Thus, we recommend stocks based on a combination of quality of management and exciting drug development candidates.

CL: How is investing in biotech stocks different from investing in other industries?

JM: The metrics for valuation are completely different, as the majority of biotech companies have no earnings. Thus, biotech analysts need to have a deep understanding of drug development and the many different drug candidates in order to put a specific company’s growth prospects into perspective. This makes experience a very important factor in this sector.

CL: Speaking of experience, MTSL has also had some “bust” years, with returns well below that of the market. What would you say to an investor who wants the potential of biotechs in their portfolio but is scared of the volatility? Do you take any steps to mitigate that volatility for the newsletter’s portfolio?

JM: As with any industry in the market, there are ups and downs. We believe that portfolio diversification can manage much of the risk while leaving room for substantial growth. Once an investor has decided what portion of their portfolio should be in growth stocks, they should build a basket of biotech stocks. A basket of, say, 10 well-selected biotech companies should provide enough diversification to allow for solid growth and also modify the risk. The bottom line is we expect the big winners to make up for the companies that fail for whatever reasons. We manage the portfolios in this fashion.

CL: What’s one important piece of advice you think more investors need to hear?

JM: There is no substitute for homework and patience. We also believe you get what you pay for and, while there are some very good sources of free information on the Internet, if you are not paying for your intelligence/information sources, the value is often questionable. Do your homework and make sure you have access to timely and reliable research.

CL: What do you see as the biggest challenge in the market right now?

JM: The biggest challenge is the economy. We need the economy to continue to bounce back and grow for investors to be interested in biotech/growth companies. Biotech investing is very tough in a recession as investors flock to safer assets in difficult times.

CL: Let us get to know you better—what else do you like to do besides investing?

JM: I am a huge baseball fan who loves the SF Giants, and also enjoy fly fishing the beautiful rivers of Northern California. I spend as much time with my daughter as possible, who, not surprisingly, is learning to both fly fish and play baseball.

CL: Anything else you’d like to add?

JM: We recently added Jay Silverman to our Editorial team. Jay is a long-time friend and colleague and has a tremendous track record in picking and analyzing biotech stocks. Mr. Silverman is President of COLS Consulting and has been a biotechnology and pharmaceuticals analyst for 25 years. In 2000, he was ranked #1 in Biotechnology by The Wall Street Journal’s Best on the Street annual analyst survey, in addition to being a “Home-Run Hitter” for stock selection. We expect Jay to help our performance with both improved stock selection and through a stronger emphasis on risk management. Thank you for the opportunity to reach out to readers and share our investment philosophy.

CL: You’re welcome, and thanks for talking to us!

Wishing you success in your investing and beyond,

*This post has been updated from a previous version.

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