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Properly Managing And Optimizing A Biotech Portfolio

  • The biotech and biopharma space is probably the most volatile area of the market. It is a high risk/high reward arena for aggressive growth investors.

  • The sector calls for a different portfolio strategy than most of the rest of the market. One must balance core holdings with speculative positions in smaller but promising concerns.

  • I have learned several tricks of the trade over the past two decades that has help me successfully invest in this space and they are highlighted below.

The biotech & biopharma space is one of the most volatile of any of the sectors of the market. This is especially true as it relates to the small caps that make up a good portion of the companies that occupied the biotech & biopharma arena. It is not unusual to see a small biotech equity be listed as the top gainer of the day in the market with another small play in the space taking biggest loser of the day honors.

Volatility is a fact of life for investors who want to invest in these high beta sectors of the markets. One does so because few if any areas of the market can offer up the five and ten baggers that are the stuff of dreams and can turbocharged the performance of one's portfolio by just be fortunate enough to occasionally catch one of these "rockets".

Over the years I have identified many of these huge winners in the pages of SeekingAlpha including Lannett Group (LCI), ZELTIQ Aesthetics(NASDAQ:ZLTQ), Novavax (NASDAQ:NVAX), Avanir Pharmaceuticals(NASDAQ:AVNR) and myriad others. Recently Eagle Pharmaceuticals (NASDAQ:EGRX) has soared over 275% since I listed as a "Best Idea" on Real Money Pro on 12/19/2014.

I have also had my share of disappointments like Regado Biosciences (RGDO)and Synta Pharmaceuticals (SNTA). It is simply the nature of the game. For every home run they will be at least one strike out. However, if managed right and optimized collection for small and large cap biotech & biopharma stocks can be a key contributor to overall outperformance from one's portfolio over time.

It is my passion and success in the biotech arena over the past two decades of investing that drove me to create the Biotech Forum which launched on SeekingAlpha early in April. I want to share my thoughts on how to properly manage and optimize a biotech/biopharma portfolio and some tricks of the trade have absorbed over many years of investing in this space. They will be the tenets of the Biotech Forum portfolio which will consist of twenty stocks.

Five of these will be from the large cap space. These companies will already have achieve profitability, have solid products & pipelines and are selling at attractive or at least reasonable valuations on a long term investment basis. These will be labeled as "CORE" positions. The remaining 15 stocks will come from the more volatile and speculative small cap sector. These will be tagged with the "SPECULATIVE" moniker.

Depending on your risk preferences you will want to weight each large cap selection three to six times heavier than each small cap pick. This will mean 50% to 75% of your portfolio will be made up of these more stable and less volatile large cap equities. The remaining portion of your portfolio we will go hunting for some multi-bag grand slams.

This portfolio will be built slowly as I believe in dollar cost averaging in these areas. This sector has outperformed the overall market for five straight years and could be overdue for a pullback if sentiment sours on "risk on" areas of the market. Each month we will add one large cap pick and three small cap equities to the mix. Once we have our twenty stock portfolio we will make adjustments/modifications as we deem prudent over time. I will also offer up some future promising opportunities each month for those who might want to assemble a portfolio in a different or faster way than how we create the Biotech Forum portfolio.

Our small cap selections will be focused on different technologies and disease areas to provide diversification. We will also look for concerns with multiple "shots on goal", partnerships with larger players within the space, strong balance sheets which also could make attractive buyout opportunities.

There are three terrible feelings when investing in small biotechs & biopharma stocks. The first is when a trial goes wrong or a company announces other disappointing news resulting in your investment cratering. Unfortunately, there is little one can do avoid these landmines as bringing a compound to market is a very complicated affair and is why one must make myriad small investments across promising opportunities in these sectors to provide diversification.

The second thing that go wrong is when one makes an investment that comes at a very opportune time. Your stock doubles or triples in short order and you do not take any profits. Over time, the stock falls back to where you bought it or even lower and the feeling of regret of not taking any gains clouds future investment decisions.

Finally, there are instances when your investment doubles or better and you cash out entirely only to see the stock triple or quadruple from there. I have had this happen many times over the decades and there are few worse feelings in investing.

I have develop a rule of thumb over the year when it comes to small biotech stocks. It is to sell 10% of your original stake once one achieves a 50% gain, 20% of the original stake after the stock doubles and 20% more if one is fortunate to have your stock triple. The other half of the original stake now rides on the "house's" money unless something drastically changes on the company's prospects.

That concludes a brief overview of some core themes that will be core drivers behind the formulation of our optimum twenty stock Biotech Forum portfolio. Each month a newsletter will be release that documents the overall portfolio of the equities in the portfolio as well as major events and upcoming catalysts for these individual stocks.


Thank You & Happy Hunting

Bret Jensen

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