How To Actually Make Money In Biotech

Weekly Issue

Some of you received an email from me this week that probably looked a little familiar. It was styled after every breathless promotion you have ever gotten from the big newsletter publishers.

You know the ones: there is a double-secret, top-secret stock that only this one analyst has discovered, and you have to read 17 scrolling pages before you find out you have to pay $2,000 to learn what it is.

The difference here is that we gave you all the stocks. Every single one of them. Free. No upsell. No credit card required. Call it a character flaw.

The stock in question is in biotech, which is not territory you would normally expect from a deep value, fundamental momentum guy like me. Let me explain what happened and where this is going.

Every day, somewhere in a publisher's meeting, someone asks the same question: "What is hot right now? What can we sell? What do people want to read? What title puts them in line?"

Biotech cycles in and out of favor, but it never goes away entirely. The reason is simple. The biggest single-day winners and the biggest single-day losers in the stock market are almost always biotech names.

Stories of biotechs going from $1 to $100. Stories of life-changing molecules. Stories of cures.

And every few weeks, another promotion lands in your inbox touting the next wonder compound that is going to end cancer forever and make everyone involved spectacularly wealthy.

The third time I received a promotion about something called AC-225, I decided to look into it seriously.

Here is the honest truth. Without an MD or a PhD, clinical-stage biotech is extremely difficult to evaluate on a fundamental basis. The usual screens that work beautifully in banks and REITs and industrial companies do not translate.

For a while, people got excited about biotech names trading below net cash, which sounds compelling right up until you realize the reason they all trade below net cash is that they raised money in an IPO and are systematically spending it on trials, regulatory work, and development. The cash is the business model. It is going out the door on purpose.

There have been edges that worked. A friend of mine who understood the chemistry used to short Phase 2 approvals systematically and did remarkably well at it. The borrow is harder now, but the phenomenon still exists because the market still overreacts to phase two results in both directions.

The problem is that without the scientific background to evaluate the underlying data, you are largely guessing about which trials deserve the overreaction and which ones do not.

Dan Rasmussen and his team at Verdad have been on the front edge of quantitative research for years. Whether it is fixed income, credit spreads, or deep value factor work, they produce serious research that holds up. When they turn their attention to a problem, I pay attention.

They have been working on a quantitative framework for biotech investing, and it is elegant precisely because it does not require you to understand what is happening inside the drug molecule.

It is built on three things that investors can actually verify: smart money ownership by biotech-specialist hedge funds with documented track records in the space, insider buying by people who presumably know something about what the science is doing, and the level of spending on research, development, and trials relative to what you would expect at a given stage.

That is a framework a generalist can replicate. The databases exist. The screens are buildable. The factors are measurable.

About every three months, as institutional holdings are updated, we will run the screen and publish a list. The list will identify the companies that clear all the boxes: biotech-specialist institutions with strong track records are buying, insiders are buying, and spending patterns are consistent with serious development rather than theater.

We will tell you something about what each company is working on.

We will not pretend to be experts in the clinical science. We will not dress it up in hype language and tell you this is the miracle molecule that changes everything.

What we will tell you is what the data says. And the data behind this framework is not thin. It has a decade of backtested history behind it. The spread in annualized returns between the stocks it identifies as promising and the stocks it flags as likely losers is not small. We are talking about the difference between strong positive returns and meaningful negative ones — consistently, over 10 years of real market cycles including the biotech boom, the biotech bust, and everything in between.

This biotech watchlist will be a quarterly addition to the Flagship Report Premium tier — at no additional charge, no new subscription required. Not a separate newsletter. Not an upsell. If you are already a Premium member, it shows up in your inbox automatically starting next quarter.

If you are not yet a Premium member, this is a good moment to become one. The four portfolios — income, deep value, momentum, and REITs — are the core of what we do, and they are performing well. The biotech watchlist is the newest addition to what is already there. You can upgrade here.

For those who got the email and are wondering what my own thinking was: IBA, out of Belgium, strikes me as particularly interesting given its cross-ownership stake in one of the major isotope producers.

Novartis and Bayer both have meaningful roles in this space as well.

Those were in the email. The email was free. If you paid $49 or $2,000 somewhere else for a list that probably overlaps with this one substantially, my sincere condolences.

Note that this is speculative money. Small positions. One hit at the right size can matter.

The Flagship Report already covers the income portfolio, which is performing well, the small-cap deep value portfolio, the small-cap momentum portfolio, and the REIT portfolio.

On that last one, it is worth remembering that in past market downturns that were not caused by real estate itself, REITs held up considerably better than the broad market and in some cases delivered positive total returns while everything else was going sideways. The income-producing, dividend-compounding nature of the asset class matters in ways that only become fully visible when things get unpleasant.

The biotech addition fits the same philosophy that underlies everything else here.

When serious quantitative research from a firm with a track record points to a measurable edge, we are going to tell you about it. We are going to break it down into plain language, explain the factors, give you the names, and let you decide what fits your own approach and your own risk tolerance. If you’re interested and aren’t a Premium subscriber yet, sign up here.

We said at the beginning that we would share ideas worth knowing about as we found them.

We are going to continue to keep that promise.

The full Flagship Report goes out Monday, as always. Thanks for being part of it.