If you're looking to double your money, the biotech sector is one of the best hunting grounds that you'll find.
So far this year, for instance, the iShares NASDAQ Biotechnology Index (NASDAQ: IBB)—an ETF that's a great proxy for the sector—has zoomed 28.2%, more than double the 13.59% SPDR S&P 500 Index ETF (NYSEArca: SPY). The IBB gained 31% last year. And a lot of individual biotech stocks have actually doubled, tripled or more—the Holy-Grail type of gains that high-tech investors crave.
But there's a problem.
You see, not all biotech stocks are created equal.
It can take 10 years and $1 billion or more to take a new drug from the lab, run it through FDA testing, and get it approved for use in the marketplace. Each of those steps along that journey poses a risk of delay, rejection or outright failure. And bad news in a high-growth stock can ignite a 40%, 60% or even 80% drop in the price of your stock—savaging your savings or retirement in the process.
But there's a way around this: a strategy that can avoid some of the biotech sector's biggest risks, while giving you access to the high growth and high returns. And one that still gives us the chance to find double-your-money stocks—the chief objective of my Five Tech-Wealth-Investing Rules.
I promised to unveil just such a stock, and today I'm keeping my word.
With a market value of $275 million, the company I'm recommending today is a small-cap play—and affords us the double-your-money potential of small-market plays. But because this company is more of an indirect play on the biotech sector (it provides the high-value ingredients that other firms need to have as they develop their own biological compounds), it gives us the best of both worlds: We get the high-growth rates of biotech even as we sidestep the typical risks faced by companies that have to pursue drug approvals through the FDA.
We call this kind of stock a "pick-and-shovel play." The company is Repligen Corp. (NASDAQ.GS: RGEN). And believe me when I tell you that you'd be hard-pressed to find a better candidate than this small-cap leader.
Repligen is a leading provider of a substance known as "Protein A"—which is used to produce several leading drugs. For instance, it's used to separate and purify disease-fighters known as "monoclonal antibodies."
This is a complex field of science. So, let me break it down a bit for you.
Protein A comes from bacteria that live in human respiratory tracts and on the skin. Repligen uses this protein because it has novel qualities that help it bind to antibodies.
In turn, these are called "monoclonals" because they are replicated as exact clones of specific antibodies needed to help fight disease. By cloning different antibodies, scientists can create drugs that target a wide range of conditions.
This unique approach gives Repligen access to some of the most important drugs on the market today. And it places the firm squarely in a large and growing market.
We're talking about a segment of the drug industry known as "biologics" because they're derived from the cells of mammals. In 2010, the last year for which good data was available, there were nearly 1,000 clinical trials under way in this field.
The sector includes protein-based drugs like monoclonal antibodies and vaccines. Analysts predict the biologics market will nearly double in sales to roughly $240 billion by the end of this decade.
A full third of that total will go to monoclonals.
And that's good news for Repligen and its shareholders. Already, the firm is a supplier for such leading drugs as:
- Avastin, used to treat colon cancer.
- Herceptin, a treatment for breast cancer.
- And Humira, prescribed for rheumatoid arthritis and several other conditions.
The stock trades at slightly less than $9 a share. But I believe it can easily double in price.
Let me show you how by running the stock through the five "filters" that make up my tech-investing strategy.
- Rule No. 1: Great Companies Have Great Operations: We look for superbly run companies with exceptional leadership. And Repligen's management team is as good as they come. Repligen has a crack management team. CEO Walter C. Herlihy assumed the job back in March 1996. Before that he logged years in senior management positions in the industry. This guy knows his science. He has a bachelor's from Cornell University and a doctorate in chemistry from MIT.
And the company continues to recruit top talent. Late last Fall, for instance, Repligen hired an exec named Jonathan I. Lieber to become the company's chief financial officer. Lieber had most recently been the CFO of Xcellerex Inc., another supplier of bioprocessing products and disposable biomanufacturing technologies—meaning he has hands-on experience with the very industry that Repligen serves.
Because Xcellerex was sold to GE Healthcare, Lieber has experience in dealmaking (a possible future sale of Repligen could give you a windfall profit on the stock). With the company he worked at before Xcellerex, he was actually involved with the IPO. And before that he worked as an investment banker in the biotech area. One thing my years in technology have taught me is that talent wins out. So this guy appears to be a heavy hitter—and a great hire for Repligen. I love to see companies bring in blue-chip talent.
- Rule No. 2: Separate the Signal from the Noise: To create real wealth, you have to ignore the hype and find companies that have rock-solid fundamentals. With a 22% profit margin and a return on stockholders' equity (ROE) of nearly 19%, Repligen has those strong fundamentals. The company has $54 million in cash and cash equivalents on hand and almost no debt.
- Rule No. 3: Ride the Unstoppable Trends: Look for stocks in red-hot sectors because they offer the best chance for life-changing gains. There's no question that Repligen has this base covered as well. We demonstrated just how hot biotech has been. And the catalysts are clear: We have millions of new people born each year around the world and average lifespans are getting much longer. That translates into growth that will last for at least several decades. And if Big Pharma wants to target the growing biologics market, odds are pretty strong that they'll have to use Repligen's Protein A.
- Rule No. 4: Focus on Growth: Companies that have the strongest growth rates almost always offer the highest stock returns. Over the past three years, Repligen's sales have grown at an average annual rate of 39%—a stunning showing on the "top line." Of course the numbers vary on a quarterly basis, but for the first three months of this year, sales rose by 28%. And Repligen keeps striking new deals to make sure it's adding revenue for years to come. In January it reached a new sales accord with drug giant Pfizer Inc. This program alone is expected to bring as much as $70 million in milestone payments and an undisclosed stream of future royalty payments.
- Rule No. 5: Target Stocks that Can Double Your Money: This is where we look at Repligen's earnings growth and see how long it will take the firm to double profits. By doing that, we can calculate about how long it should take for the stock to double in price. I've gone through the firm's financials in detail and I'm projecting earnings per share will grow by an average 24% over the next five years. Now we use what I call my doubling calculator. Mathematicians call it the "Rule of 72." Let's divide the compound growth rate of 24 into the number 72. We find that it should take roughly three years for Repligen's stock to give us 100% gains—doubling our investment.
We have one more thing going for us with this stock—a potential catalyst that a lot of Wall Street players aren't considering.
I'm talking about Repligen's low stock price—of less than $10 a share.
A large number of institutions—either by choice, or as defined by their investment charter—won't touch a stock under $10. . .no matter how alluring the company's potential might be.
But once the stock hits that $10 "trigger point"—meaning it's become "institutional grade"—expect to see a large number of sell-siders "initiate coverage" or issue "upgrades" to their ratings. Although we never follow Wall Street's lead, we're always happy to see them deliver liquidity to a stock that we've already recommended, and that you've had the opportunity to buy.
This new institutional support will turbocharge the rally, and could ignite a much-stronger-than-expected updraft in Repligen's stock price.
For investors looking to magnify their personal net worth, this is the kind of stock you dream of finding—an undiscovered small-cap in a high-growth business. . .and that can double your investment in surprisingly short order.
Strategic Tech Investor