A Strange Kind of Gold Investing
By Rob Fannon, editor, Phase 1 Investor
April 25, 2008
It sounded crazy when I first heard it...
"If you're a great speculator in biotech stocks, you'd make a great speculator in gold stocks."
Several weeks ago on Jekyll Island, Georgia, my colleague Matt Badiali joked how a biotech/medical investor is a lot like a gold/oil investor... Matt is a geologist and gold-stock specialist, and his "rules of the game" are similar for someone looking to make a fortune in the biotech market...
1. Both sectors have a handful of big companies that dominate world production... In gold, it's companies like Newmont Mining and Barrick Gold. In drugs, it's your Pfizers and Mercks.
2. Both sectors are subject to lots of hype with new discoveries. Both gold and biotech stocks can rise hundreds of percent in a single day after a discovery is made.
3. Both sectors tend to go through huge booms that make a handful of investors rich. Those booms are followed by huge busts that turn people off of the sector for years.
For instance, the price of gold peaked in 1980, then ground lower for 20 years. It took a rise above $800 an ounce for people to get interested in gold investments again (although gold stocks have soared since 2001).
It's much the same in biotech stocks... In the late 1990s, biotech stocks ran up more than 600% in just a few years. After the boom, they fell an average of 70%. Only now are those losses moving to the back of investors' minds.
These two sectors feature another similarity that is rarely talked about: No matter what the big producers and "wildcat" explorers do, they have to spend huge amounts of money on equipment. They have to buy "picks and shovels." This is where you can safely make a fortune even when things aren't hot in gold or biotech.
I've covered some of the ultimate biotech equipment stocks in these pages. One of my favorites is Covance... a company that does nothing but perform contract research services for big drug companies. Covance gets paid whether a new drug is a big hit or not.
I also like drug distributors and medical suppliers. Becton Dickinson is the market leader in producing needles, diagnostic supplies, and catheters. McKesson is the largest third-party medical distributor.
Then there's IMS Health, which I call "Big Brother for Big Pharma." These guys track which doctors are prescribing which drugs, what kind of surgical instruments are most popular in certain geographic areas, which direct-to-consumer ads work best for sales... and then they sell the data to the highest bidders.
Among my most successful "picks and shovels" biotech investments are the health care REITs. These dividend payers own and rent laboratory space, and have given my long-time readers 25% gains in less than a year... in a terrible market for real estate.
With a lot of work – and a little luck – you can strike it rich on the right gold mine or biotech start-up... But for safe, steady gains check out the servicers and suppliers. These companies get paid in good times and bad.
Good investing,
Rob Fannon
