Biotech stocks are among the riskiest investments, but there is also the chance of huge returns.
I'm not talking about 25% or even 50% returns on your investment. Returns of 100%-plus are not uncommon over time.
All biotech stocks have a single goal: Bring drugs to the market.
Due to Food and Drug Administration regulations, this is a long and slow process. It is said that one out of 1,000 drug candidates that enter laboratory testing ever reach the human testing phase. Those are huge odds for an investor.
Bringing a drug to the market can take years and sometimes more than a billion dollars: The lab testing process takes three and a half years before the first of three human trials. If a drug makes it to the first phase, it has a 1 in 5 chance of getting to market.
Count on volatility during testing.
Every smidge of good news could take the stock higher, and every negative rumor could send it lower. If the news is particularly bad, a once high-flying biotech stock can be smacked down, never to recover. On the other hand, positive news can easily double the stock.
So how can investors tilt the odds of success in their favor? Nothing is certain in the crazy world of biotech investing, but by following these three simple guidelines, you can increase your chances.
It's always a good idea to spread your risk across multiple companies.
While most drugs fail the testing phase, it takes only one or two to more than cover a company's losses and provide solid profits. One nice feature about biotech: High risk levels generally make a stock very affordable early on. In fact, many promising biotech stocks can be purchased for less than $5 a share.
2. Check the debt
Does the company have steady funding lined up? This would mean cash would be granted to the company when milestones in the drug development/testing process are reached. Avoid firms that have only have a single, non-recurring investment. Biotech is a notorious cash burner, so steady payments are a must for a company's survival.
3. Insider ownership
Do the corporate management or owners have a stake in the company? This would help ensure corporate health. Be cautious if there is no insider ownership or if insider sells are greater than insider buys.
With these tips in mind, here's a small biotech stock with major upside potential:
Retractable Technologies (RVP)
This company designs, makes and markets medical safety syringes.
Unlike some low-priced biotech stocks, Retractable has a balance sheet of more than $9 million in revenue, a market cap of more than $25 million and only about $4 million in debt.
I like its insider ownership. Nearly 70% of the shares are insider-owned. During the past 12 months, there has been one insider "buy" transaction with no "sell" transactions.
The company's competitors -- Becton, Dickinson and Co. (BDX) and Covidien (COV) -- have 30,000 to 40,000 employees, compared with Retractable's 144. This says to me that Retractable is a much more agile and scrappy company, giving it a serious competitive advantage.
Risks to Consider: Biotech stocks assume risk but offer huge upside potential. If a drug fails to pass testing or draws a lawsuit, it could be detrimental for the company and its stock.
Action to Take --> A look at the technical picture shows Retractable to be a classic breakout play. Entering long on a breakout close above $1.25 a share makes sense. I wouldn't be surprised to see this stock at $5 within 18 months.
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