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Biotech Sector Hits All-Time High! Here’s What You Need to Know

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As bond yields rise dividend paying stocks are out of fashion but growth never goes out of style. No where is that more apparent than in the performance of biotech stocks in 2013. Yesterday the Nasdaq Biotechnology Index (^NBI) hit a record high and is now up over 46% in 2013.

Mark Lehmann of JMP Securities says the returns have been great but the risk is huge. The stocks are driven largely by FDA approvals. If a company gets a drug to market the stock can double or triple. If not the results can be devastating to your portfolio.

With so much riding on FDA trials it's not surprising that drug stocks in general and biotech in particular have long been dogged by rumors of insider trading. One of the charges in the SEC's case against SAC Capital accuses a portfolio manager at the fund of using an illicit "network of doctors in the field" to gain access to non-public preliminary drug trial results. The charges have yet to be proven but they do reflect conventional wisdom on the industry that it's all but impossible for individuals to research biotech or other drug companies as thoroughly as institutional investors.

Lehmann says the best way to reduce some of the investing risk in the sector is to focus on companies with solid fundamentals rather than those subject to all-or-nothing drug trial results pending. Even then there's no guarantee.

Lehmann's favorite name in the space encapsulates the risk profile in biotech. The stock is Cytokinetics (CYTK) and its up over 100% year-to-date despite getting crushed on Tuesday on reports of weak trial results for an ALS drug. Lehmann says the drop is overdone and thinks now might be good time to start building a position.

Even with one-off opportunities like CYTK, biotech investing requires a ton of homework and a strong stomach. More risk-adverse investors who don't mind the risk should also consider investing in a basket of stocks or through the popular iShares NASDAQ Biotech ETF (IBB).

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