A few things biotech, a few things robotics, and a whole lot of money to be made. Let’s get right into it today.
If you were following the market last week, you likely would have noticed a particular stock under ticker symbol ITMN. The security closed up 171% on Tuesday.
At first glance, most investors would expect this to be the result of a merger or acquisition, but that certainly wasn’t the case.
ITMN is the ticker for InterMune Inc., a biotechnology company focused on developing treatments for idiopathic pulmonary fibrosis (IPF) in North American and European markets. The company had announced its lead drug candidate Pirfenidone met all three endpoints during its Phase 3 trial, an outcome about as close to guaranteed FDA approval as you’re ever going to get.
Regardless of the overwhelmingly positive news for InterMune, some of you may think the market went temporarily mad here. I’d be keen to agree.
Pirfenidone is already approved in the European market, which is expected to garner an estimated 38% of IPF therapy revenue through 2017. In order to justify a 171% valuation bump, the U.S. market share would not only have to be larger, but it would also have to be immediate and guaranteed.
Investors won’t see a final PDUFA decision for at least another six to 24 months, and the FDA has already sent Pirfenidone back to the drawing board before. At the same time, big pharma players Biogen and Gilead are right on InterMune’s tail with promising Phase 2 candidates in the pipeline.
So what exactly can we make of all this? Well, it’s pretty simple: the biotech run-up we saw in 2013 has carried over well into the new year, and investors are still willing to pay significant premiums on positive news alone.
Just take a look at the performance of the First Trust NYSE Arca Biotechnology Index Fund year to date:
While we’re on the subject of funds, let’s turn our attention over to the Robo-Stox Global Robotics and Automation Index ETF (NASDAQ: ROBO), which first hit the market last October.
The ETF has outperformed both the DOW and the S&P 500 since December, which is no surprise considering the long thesis Christian DeHaemer and I have written on robotics this year.
If you’re bullish on the robotics industry like us, Robo-Stox certainly isn’t a bad bet. However, you should always consider the limited liquidity associated with ETFs — especially those as new to the market as ROBO.
If you’re an aggressive investor looking for significant gains, it’s also worth noting that a diversified fund like this one simply won’t get you there. As you likely noticed in the figure above, ROBO has moved in tandem with major indices so far, and we can expect this to continue as the fund matures.
If you prefer to actually take control over your portfolio (as you should), a better strategy than buying and holding an ETF is to do some due diligence and investigate the individual securities held by the fund you’re interested in.
I’ll share the specific holdings of Robo-Stox with you below, but let’s first look at a few of the benefits gained by buying and selling individual stocks rather than investing through funds.
The first benefit we’ll consider is dividend yield. If you prefer to take a Buffett-like approach to investing and compound your growth over long periods of time, you’re undoubtedly interested in dividends.
Now, there are many dividend-focused ETFs on the market to choose from, but the yields are rarely worth bragging about. Take one of the most popular dividend-oriented funds, the Vanguard Dividend Appreciation ETF (NYSE: VIG), for example. VIG has a 12-month yield of just 1.94%, yet its top holdings such as PepsiCo, Procter and Gamble, and Wal-Mart all offer significantly higher yields.
In many cases, investors are better served cherry-picking a dividend-oriented ETF’s best holdings.
Another factor to consider is that ETFs are often passively managed. For emerging technologies, this can be very dangerous. Young companies change quickly, and it’s important to stay on top of the latest developments.
There are companies in ROBO, for example, that depend on FDA approval for medical devices. If you were to find in your own research that a certain device was likely to be delayed or even denied approval, you couldn’t specifically mitigate that risk unless you owned the individual stock.
You’ll notice that the reasons above tie in nicely with the general aspect of control. The best way to make money off stocks is to pick the winning player — not spread your investments across an entire industry — and this is virtually impossible to accomplish through funds. You may be bullish on a few robotics stocks, but all 81 in the Robo-Stox portfolio? Probably not.
If you were to take a peek at our portfolio over at Technology and Opportunity, you’d notice there are just five robotics stocks — that’s 16 times fewer companies than ROBO. If you happen to wondering why, the answer is that we’re incredibly picky and do ample amounts of research.
When we look through ROBO’s holdings, each company fits into one of three categories: stocks we drool at, stocks we laugh at, and stocks we’ve still yet to research. You can take a guess at which ones make it through the filter.
Ultimately, we know this strategy pays off, and we have the numbers to prove it: Our average six-month gain on robotics securities alone is 35.58% right now — five times the return of ROBO in the same timeframe.
As for biotech, the figures are even better. More than half of our biotech picks are showing triple-digit gains right now, with winners as high as 233%.
For a list of ROBO’s entire holding list, click here.
Turning progress to profits,
Jason Stutman
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