With biotech companies all over the news these days, you can't help but wonder if you should own these stocks so that you too can make tons of money on the next hot drug.
But then you flash back to the tech bubble of the late 1990s and you remember what happens when you try to chase the dream.
Risk factors aside, biotech does have a place in a well-rounded portfolio. And whether you consider it part of your health care allocation or you invest in it with your so-called play money, a small percentage of biotech might be worth the gamble.
At the end of April, the
was a little more than 13% health care, and 10% of that was in biotech. "So if you're looking at a well-diversified portfolio, you can't ignore it," says Patricia P. Houlihan, CEO and founder of Houlihan Financial Resource Group in Reston, Va.
Others will argue that it's just too risky for it to be a part of your core portfolio. "We consider it more as play money. We don't think the average portfolio should have a section for biotech," says Louis Stanasolovich, CEO and founder of Legend Financial Advisors in Pittsburgh.
The truth is, biotech stocks can be risky. Biotech companies, by definition, are in the business of bringing new products to market and most are not profitable. Often, none of these new drugs or medical devices is proven, says John Zbesko, senior research analyst at Schwab Equity Rating Department. Because these companies are in developmental phases, their fundamentals generally are not very strong. Schwab assigns ratings to 118 biotech stocks, and only two of those companies get A's. But a whopping 15 get F's. "We find that most biotechs have poor ratings," he says.
And because these companies are so volatile, it is not uncommon for them to trade up or down dramatically on news. For instance,
has been on a huge run recently. The stock went from the mid-$40s to the mid-$70s intwo months. But if the stock can jump up that quickly, it can presumably fall just as fast.
So while you don't want to bank too much money on these companies, you may not want to avoid them either. First determine your risk tolerance and then decide the best way to play the sector.
Get Some Exposure
Whether you consider biotech part of your health care allocation or you use your play money to invest in the sector, your best bet is to stick with bigger names.
Applied Biosystems Group
both got A's on the Schwabratings scale. "That means they have strong fundamentals as well as momentum and they fell at reasonable values so things look favorable for those two companies," says Zbesko.
because they'renot so dependent on one drug, which is why she suggests you stay clear of companies like
. With just one drugin the pipeline, the company could get hammered if that drug doesn't work out.
Keep in mind you shouldn't just buy and hold these stocks. You have to stay on top of them, reminds Houlihan. So if you don't want to spend the time researching and dissecting, consider other options.
Nasdaq Biotech iShares
is basically a big biotech index fund and is an inexpensive way to get sector exposure. These iShares are designed to track the Nasdaq Biotechnology Index, which was down almost 12% year to date prior to Wednesday's advance.
The Biotech iShares includes more than 100 biotech companies that trade on the
, but as of May 3, the top 10 holdings had a combined weighting of roughly 40%, with Amgen alone having a 17% weighting.
There are some mutual fund options out there, too. The
Fidelity Select Biotechnology fund is a good choice for strictly biotech exposure. If you're tentative, consider a health care fund, like the
Schwab Healthcare fund. It has some biotech holdings but themajority of the fund is in health care. The same goes for the
Vanguard Health Care fund, although it closed at the end of March.
So consider adding some biotech to your portfolio. The drug world is not a static environment. Someone will discover a cure for AIDS someday. And if you're holding the company that does, that's a real "win win."
Editor's Note: Click here for TheStreet.com's coverage of the recent American Society of Clinical Oncology conference in Orlando, Fla.
Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;
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