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One Sector to Avoid, One to Buy and Get RichBy Jeff ClarkTuesday, January 9, 2007 Why bother with the precious metals stocks when there’s so much gold in biotechnology?
In November 2005, I turned bullish on gold. In fact, I wrote in The Big Trend Report that the AMEX Gold Bugs Index (HUI) looked ready to rally over 60% from its level at 250.
That’s exactly what happened... and by May 2006, we sold all of the gold positions we had purchased six months earlier. Since then, we’ve been sitting on the sidelines, waiting for another opportunity to get back into the gold game.
We’re still waiting.
Gold stocks have gone nowhere for the past seven months. And, as much as it pains me to say it, they’re not going anywhere in the near future either.
The long-term argument for gold and gold stocks is overwhelmingly bullish. But the sector still needs to shake out the weak hands (including my Mom) before it can mount a sustainable advance. I still believe there’s too much optimism toward gold stocks for investors to make a lot of money in them.
I’m sticking with my downside target of 265 for the HUI. That type of decline will be more than enough to shake up the sector and create a number of bargain opportunities. And we’ll be ready to pounce when that happens...
For the time being, however, there’s a stronger opportunity in the biotechnology sector.
Most of the time, biotech stocks trade at premium valuation levels. Investors – lured by the prospect of a wonder drug that cures cancer, burns fat, eliminates pain, and basically makes the world a nicer place – bid up biotech stock prices to the point where the potential rewards are small and the risks are high.
But that’s not the case today. Today, the sector is drowning under a tsunami of pessimism. Headlines report spectacular drug failures – such as Pfizer’s (PFE) $800 million flushing of its new cholesterol drug, and Nuvelo’s (NUVO) alfimeprase explosion (which trimmed NUVO’s stock by 80%). The FDA is slow and reluctant to approve new drug applications. And investors are treating the stocks like in-laws who need money.
These conditions have created the best opportunity we’ve seen in biotech stocks in years. And now, biotech stocks are ready to run.
But you can’t just jump in and buy any old biotech stock. The sector is loaded with land mines, and you have to tread cautiously if you expect to make money.
To tread cautiously means to look for stocks that are trading at a small premium to the cash on their balance sheets, have a good story behind the drugs in their pipelines, and are relatively unloved by the folks on Wall Street.
The two stocks I told subscribers about last month have all of these characteristics. And so does the company I’ll be recommending in the next issue of The Big Trend Report.
The company I’m recommending on Thursday trades at a discount to its book value, and it does something virtually unheard of in the biotech world... It pays a dividend.
It’s not some piddly little dividend either. It’s a big, fat 7.5% distribution. And the potential for capital gains is enormous.
So if you’re looking to strike it rich, stay away from the gold mines for a while longer. The real gems are in biotech.
Best regards and good trading,
Jeff Clark
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