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Life Science Investing

Within the universe of investment options available to those trying to grow their hard-earned cash, there is perhaps no more compelling investment thesis than the science of life.

Life sciences is a term that is broadly defined as any branch of science — for instance, biology, medicine or ecology — that studies the organization of living organisms, their relationships to each other and the environment.

The sector is generally divided into pharmaceutical companies, which focus on chemistry and small molecules, and biotechnology companies, which use living organisms or their derivatives to make products for specific healthcare uses. There are also companies that focus on diagnostic testing and firms that make medical devices that manage pain and check for irregularities in bodily functions.

Over the years, as medical science and other technologies, like computing power, have advanced, the industry has morphed into a sector containing hundreds of companies, some of which have market capitalizations well over $50 billion.

With healthcare eating up an ever-greater proportion of government budgets — last year, health expenditures represented close to a quarter (23 percent) of government spending in the United States — and the western world’s reliance on pharmaceutical drugs unlikely to abate, investing in health-related companies is a solid investment strategy.

While the life sciences sector is not immune to the vagaries of stock markets and macroenomic trends such as inflation and economic growth, recent numbers show that it has done quite well in the face of some challenging economic headwinds.

The Wall Street Journal reported that healthcare mutual funds “gained 19.7% on average in the 12 months through Nov. 15, [2012], and are up 12.6% each year over the past three years,” according to investment-research firm Morningstar. By comparison, the S&P 500 (INDEXSP:.INX) stock index gained 10.1 percent during the same period.

The sector is also considered a safe haven due to baby boomers — a large and growing market segment whose consumption of pharmaceuticals and need for an endless array of healthcare services is only going to get more pressing.

Harry Dent, bestselling author and financial forecaster, said this month that he sees life sciences as a good place for investors to be, particularly due to continuing economic uncertainty.

“If I am right, and stocks crash again in late 2014 or early 2015, I want to buy in the healthcare sector in the U.S. and Europe, especially the most leveraged areas: biotech, medical devices and pharmaceuticals. The baby boomers will continue spending on healthcare and healthcare products, even as budgets get crimped by entitlement reductions,” he noted.

Small-pharma, cancer treatment are investment targets

John McCamant is the editor of the Medical Technology Stock Letter, an established source for stock recommendations and news about medical technology companies. McCamant believes that from an investor point of view, pharmaceutical companies carry the best chance of high returns considering their potential for developing cures for intractable diseases like cancer, Alzheimer’s disease and multiple sclerosis. Companies that succeed in finding cures can develop drugs whose patient costs run up to $100,000 a year; while that is a heavy burden to pass onto a patient, it translates into huge profits for the corporations that manufacture such drugs.

Investors who get into these stocks early enough can see returns in excess of 10 times their original investment. However, there are risks, an important one being side effects from drugs. For example, those associated with chemotherapy can make the treatment unworthy of the payoff. McCamant equates it to the stock market in terms of risk versus reward. “It’s risk versus benefit or greed versus reward,” he said in an interview with Life Science Investing News. “How much effect am I having on the patient versus the side effects?”

McCamant also noted that unlike the resource or tech sectors, where there is normally a stark division between academia and business, in pharmaceuticals the line is blurred, with about half of new drugs coming out of universities. That means that investors interested in life sciences should keep their ears to the ground on discoveries made at medical schools or associated institutes.

“They often start off with some interesting science and then the companies form and start creating different molecules to go after the technology they own,” he said, adding that drug company CEOs often start out as academics or scientists. “The technology has shoes — often the guys will start off at universities and move into commercial.”

Cancer treatment is an area that McCamant sees as an important area for life sciences investors to consider.

He pointed to the high-profile case of NHL hockey star Mario Lemieux, who in 1993 was diagnosed with Hodgkin’s lymphona and was forced to miss games while undergoing aggressive radiation treatments. The Pittsburgh Penguins forward was prescribed the cancer drug Rituxan and within two months was back on the ice, his cancer in remission. Rituxan, manufactured by Genentech, is now one of the world’s largest selling drugs, thanks in part to the publicity generated from the Mario Lemieux story.

“That’s where we get excited is that when you get to the actual cause of disease and maybe you can create a cure and and get close, you’re certainly going to get better treatments and fewer side effects,” McCamant said.

Number one rule for investors: look at management

But given that literally hundreds of companies are conducting research and studies into potential cures, how does an investor separate the wheat from the chaff?

McCamant recommended that investors do their homework, and most importantly, look at the management behind life sciences companies. Very often, the people running these companies need to come with a diverse set of skills in order to understand the complex science behind the treatments and to communicate that understanding to an investor audience.

“These are some of the hardest companies in the world to run in terms of the level of complexity,” said McCamant. “You’ve got to be able to interact with your own scientists, the FDA are very detailed and they also need to know and understand the science, and if you’re public you need to deal with Wall Street. You also need to potentially do partnerships with large and small companies.” Those that do well are the ones that best manage expectations, he noted.

Another common mistake: “don’t rush into an investment and make sure you know what you’re getting into on multiple levels.” McCamant pointed out that investors need to be aware of the phases that most life sciences companies go through as they advance from initial drug testing to human clinical trials, to eventual commercialization. Timing it right can result in every investor’s dream of a 10 bagger. Mistime it and your gains could quickly turn to losses, especially if the company has poor testing data or runs afoul of the FDA, whose job is to protect the public.

And like other sectors, it’s important to watch out for red flags such as overdilution, or what McCamant describes as “monsters,” such as Obamacare, which resulted in the whole sector trading off.

Those who persevere, however, may not only be rewarded with handsome returns, but can also sleep well at night, secure in the knowledge that their investment is actually helping to change people’s lives in a positive way.

“We’re making a difference at the end of the day, it’s not trivial in any form,” McCamant said.

Resource Investing

Many people have read little in the news about commodities investing since the 1997 collapse of Bre-X Minerals. But the junior mining industry has changed since then, and opportunities for investors abound.

The Bre-X Minerals scandal was something of a wake-up call for those involved in the junior mining market. Thousands of investors all over the world lost billions of dollars in the aftermath of the event, and the entire junior mining space was painted in a negative light. Stories of past failures were brought to the surface, and every junior mining company, legitimate or not, was placed under the microscope. Many were unable to gain financing in the newly hostile environment and dropped off the map.

That drought in financing lasted almost a decade. However, even as junior mining companies suffered and commodities prices remained low, the economies of developing countries continued to grow. Many of those countries — such as China, India, Brazil and Russia — have now emerged as economic powerhouses, and they are hungry for commodities like never before.

Another positive trend during that decade was the modernization of the junior mining space from a regulatory perspective. Among other things, the Canadian Securities Administration, a forum for the 13 securities regulators from the country’s provinces and territories, created guidelines for how companies must disclose scientific and technical information when exploring for minerals. Guidelines now exist for everything companies say about their findings, and companies must have what they say vetted by external, independent organizations.

Given those sweeping changes, many investors are wondering whether it’s now safe to invest in junior mining companies. And for many market watchers the answer is yes. The resource space is currently recovering from a bear market, and the overall consensus is that a lot of companies that are creating shareholder value are still priced well below what they are worth.

The chart below from Trading Economics gives some idea of where the market is at right now. It shows the performance of the S&P/TSX Composite Index (INDEXTSI:OSPTX) from January 1, 1990 to April 4, 2017 — many junior miners are listed on the index, and when it’s trending upward it’s generally a sign that commodities are doing well too.

Chart via

That said, it’s important to remember that junior mining companies inherently come with a fair amount of risk attached. The success of any company depends whether it can find minerals in the ground and sell and ship them to buyers for more than it costs to produce them. Those things depend not only on the cost of setting up a mine and processing ore, but also on the market price for the commodity being sold and the mine’s proximity to the market it’s selling to. Like so many entrepreneurial situations, myriad things can go wrong.

But of course, there are also significant opportunities for profit, and many investors are looking for a piece of the pie. Some hire experts to manage their money, while others decide to go the extra mile and investigate in hopes of finding the next great company themselves. All investors, however, can rest assured that the junior mining industry has progressed to the point that the information companies release has been reviewed by experts in the field who stake their reputation on its accuracy.

This description was last updated on April 22, 2017.

Tech Investing

The technology sector may arguably be the most important section of today’s economy. With technological innovations transforming every aspect of business in virtually every market, technology investing is driving the way we understand investing as a whole.

Although the term technology encompasses any instrument or system that solves a problem more effectively than pre-existing solutions (think of the invention of fire!), today technology has moved well beyond these humble roots. From 3D printing, which has transformed the way companies approach manufacturing, to nano tech, which has benefited causes as diverse as cancer therapies and solar energies, new technologies are radically transforming our world.

Major Tech Sectors

It is difficult to separate the technology industry into separate parts, as there are so many connections uniting this industry. However, Investopedia suggests some general subsections into which the the tech industry can be divided.

Network technology companies encompass internet based businesses and e-commerce site, like Google (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), which have transformed commerce in both business-to-customer and business-to-business focused realms.

Software bridges the gap between humans and machines, facilitating access to advanced hardware technologies.This section of the technology sector is dominated by large software companies like Microsoft (NASDAQ:MSFT). However, due to relatively low start up costs, there are also a plethora of start-up companies in this sector, developing everything from new apps to cloud based computing solutions.

Hardware devices, usually driven by semiconductors, can include computers, cell phones, technical equipment and telecommunications equipment, amongst other things. Semiconductors, also known as micro/nano chips, make up the backbone of the tech industry, powering everything from supercomputers to cell phones. This section of the tech industry is perpetually working towards creating smaller, faster, and cheaper chips while at the same time increasing functionality and storage capacity.

However, these divisions are very general, and always bleeding into one another. A discussion of technology investing cannot be limited to computers and nanochips. New technologies can break ground in medicine, agriculture, manufacturing, energy production, and most other sectors of the economy. If there is a breakthrough new innovation, you can be assured that technology played some role in it.

Technology Investing

There is an almost infinite array of investing opportunities in the technology sector. Indeed, our increased reliance upon computers has generated entirely new fields of investing potential. For example, the sheer amount of information generated from day to day transactions has generated the need for data companies, which store, process, and analyze this information, and cloud computing solutions, which store this data on secure external servers.

However, with the good comes the bad, and this increased reliance on computer platforms has led to a new generation of cyber attacks, which target the secure cyber platforms of companies, governments, and other organizations. Luckily, cyber security has emerged as a new growth industry, to ward against these attacks.

These growing technology markets bode well for technology investing as a whole. By carefully researching tech companies, sizing up their competition, and keeping a diligent watch on the markets, investors can expand their opportunities and maybe even catch the wave of the next technological revolution.