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Five Biotechs Worth Follow Up

Posted: Oct 03, 2007 11:37 AM by Matthew McCall

Tickers in this Article: LIFC, BLUD, SGEN, AMLN, NUVA

As the biotech stocks begin to garner attention, there are a few niche areas within the healthcare industry that are looking attractive. In particular, the medical devices and diagnostics are worth looking into before the fourth quarter begins.

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Stocks versus ETFs
Often times, buying an exchange-traded fund (ETF) in a sector you want to gain exposure to is the best strategy. This is definitely true when it comes to the biotech sector, due to the high volatility biotech stocks typically see. However, there are certain times when buying a few stocks may give investors the same diversification as an ETF.

The key difference of buying a handful of individual stocks is that you act as the manager and must pick the stocks you feel will outperform. This can be a daunting task, especially for an amateur investor. But if you have the correct resources it can be profitable and fun. (For related reading, see An Inside Look At ETF Construction.)

Building a Healthcare ETF
To take advantage of a healthcare rally in specific sectors, one strategy would be to buy a handful of stocks that can give the portfolio concentrated exposure and at the same time some diversification.

By purchasing approximately five stocks, it will eliminate a large portion of the company-specific risk of buying a single stock, and, at the same time, it won't over-diversify the portfolio. (For more insight, check out The Dangers Of Over-Diversification.)

After some digging, I've come up with five stocks that I think hold potential to offer both growth and diversification, and deserve some follow-up research by investors interested in constructing a position in this sector.

Five For Follow Up
#1 Immucor
The medical diagnostic sector has seen a rash of mergers over the last few months and Immucor (Nasdaq:BLUD) has used the increased optimism for the sector to run to a new high. The company makes blood test reagents that are used by hospitals, blood banks and even Red Cross blood labs. Immucor recently signed a contract with the Red Cross to supply 19 of the company's systems in five locations. Immucor's most recent earnings report showed a 51% increase in annual profit, along with new records for revenues and net income.

#2 Nuvasive
Next up is Nuvasive (Nasdaq:NUVA), a medical equipment company that supplies devices for noninvasive spinal surgery. Nuvasive has yet to turn a profit, but that statistic should probably change next year. The firm's top-line revenue has been growing at a rapid rate - revenue increased more than 50% last quarter. The stock has been on a tear, gaining 55% in the first three quarters of 2007. NUVA will supply a high growth aspect to an investor's portfolio.

#3 Seattle Genetics
The smallest stock, based on market cap, is Seattle Genetics (Nasdaq:SGEN), a biotech company that is working on a number or cancer drugs. With a market cap of only about $800 million and a negative net income, Seattle Genetics is a speculative play on the potential of its drugs. The company is currently partnered with several big-name pharmaceutical companies in the development of drugs using its antibody therapy to treat cancer. At least some investors must see promise in Seattle Genetics, because in September the stock rallied through its previous 2001 high to trade at its best level ever.

#4 Lifecell Corporation
Not quite twice the size of Seattle Genetics is Lifecell (Nasdaq:LIFC), a biotech company that works in the tissue graft market. The company takes cadaver skin and processes it for use in plastic surgery, dental and burn procedures. The company also recently received approval for a new grafting process that involves pig skin. According to the company, its products have been used in over 900,000 procedures.

#5 Amylin Pharmaceuticals
A final company for consideration is Amylin Pharmaceuticals (Nasdaq:AMLN), a biotech company that is focused on diabetes. The company develops its diabetes drugs based on the hormone Amylin, which the company believes can regulate the patient's metabolism. With a market cap of $6.6 billion, Amylin is the largest company in this list. As obesity is a growing problem throughout the world, especially in the U.S., diabetes should become more prevalent.

Time to Start Buying?
If you are now ready to go ahead with your follow-up research on these, the final step in that process involves buying the individual pieces for your portfolio. I would argue the best strategy is to be patient and use pullbacks in the stocks to begin building positions. Remember that investing is a marathon, not a sprint, and patience will pay off over the long-term. Good luck on your new venture - ETF manager!

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By Matthew McCall

Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.

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