Buying Biotech Stocks? Be Cautious.

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Biotech stocks are hot again this year as investors hope for spectacular gains like last year. In 2014, biotech stocks returned more than 34%. While the NASDAQ is up by 7.5% year-to-date (YTD) the NYSE Arca Biotech Index has shot up by 19.2% YTD.

The following chart shows the 10-year price return of the largest biotech ETF – iShares Nasdaq Biotechnology (IBB):

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IBB 10 years

 

Source: iShares

The chart shows that biotechs have taken off like a rocket since 2011 and there seems to be no signs of slowing down.

Though biotech stocks are on an upward trend caution is needed for investors looking to commit new capital to this sector. Here are some of the reasons to be cautious about this sector from an article by Tom Stevenson of Fidelity,  UK:

  • The graph below shows the MSCI Biotech Index thru late March this year. This chart looks almost similar to the NASDAQ 15 years ago. Biotech stocks have shot up six-fold in the past ten years.

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chart-msci-biotech-index

  • Many start-ups with no revenues or profits are bid up since no-one knows what they are worth.
  • About three-quarters of companies in the NASDAQ biotech index have no profits.
  • Just five firms account for more than 80% of the sector’s earnings.
  • Much of the biotech rally is momentum-driven and unsupported by fundamentals.

Source: Beware the temptation of the biotech bubble,  Mar 31, 2015, Tom Stevenson, Fidelity,  UK

Some of the largest biotechs by market cap include Amgen Inc. (AMGN), Gilead Sciences Inc. (GILD), Biogen Inc. (BIIB), Celgene Corporation (CELG) and Regeneron Pharmaceuticals, Inc. (REGN).

Nearly 150 biotech companies trade on the NASDAQ with 148 firms included in the The NASDAQ Biotechnology Index. The complete list of biotechs traded on the exchange can be found here. As discussed above, many of these firms are highly risky for long-term investments. The table below shows some of the worst-performing biotech stocks in 2014:

CompanyTickerTotal return in 2014 (%)
Nymox Pharmaceutical CorporationNYMX-93.4
Elbit Imaging Ltd.EMITF-93.1
PhotoMedex, Inc.PHMD-88.2
Sophiris Bio Inc.SPHS-85.4
WaferGen Bio-systems, Inc.WGBS-85
Nanosphere, Inc.NSPH-82.9
Cyclacel Pharmaceuticals, Inc.CYCC-82.6
MELA Sciences, Inc.MELA-81.3
Cytori Therapeutics, Inc.CYTX-81
Regado Biosciences, Inc.RGDO-80.9
BioLife Solutions, Inc.BLFS-80.5
Alcobra Ltd.ADHD-79.3
Prana Biotechnology Ltd Sponsored ADRPRAN-76.6
Exelixis, Inc.EXEL-76.5
Cleveland BioLabs, Inc.CBLI-75.6
Kamada LtdKMDA-74.4
Genetic Technologies Limited Sponsored ADRGENE-73.1
Acura Pharmaceuticals, Inc.ACUR-73.1
Response Genetics, Inc.RGDX-72.7
OncoGenex Pharmaceuticals, Inc.OGXI-72.5

Source: The Worst-Performing Biotech Stocks Of 2014, Forbes

The stocks shown above plunged between a shocking 72% to 93% in just one year. So before investors dive into biotechs they have to be highly selective and allocate only a very small portion of their assets to this sector at current levels, if they decide to invest. Ideally one may want to wait and watch if this rally can hold and stock prices come to sane levels based on fundamentals.

Disclosure; No Positions

Death By Sugar: How Much Sugar Is In Our Favorite Foods?

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Sugar is one of the most potent “drugs” that is consumed by masses on a daily basis. High consumption of sugar followed by lack of any exercise or leading a sedentary lifestyle leads to obesity. In fact, obesity is one of the major healthcare issues in the U.S. where billions of dollars are wasted each year treating all the healthcare issues created by it. Sugar is one of the leading causes of obesity. This legally approved drug is mixed in plain sight with most of the foods we consume and is almost impossible to avoid.

The following are some of the interesting facts from an article on Sugar in MaClean’s magazine:

  • Canadians eat 88 pounds of sugar per year. Americans naturally beat their northern neighbors with an annual intake of 96 pounds per person according to data from the U.S. Department of Agriculture.
  • Of the 600,000 items sold in U.S. grocery stores, 80% of them have added sugar. Sugar is pretty much added to anything we buy as food from grocery stores. That is a can of “pure” orange juice with no added concentrate tastes like sugar water and nothing like orange juice. But since people have been drinking this type of orange juice since they were born most cannot even possibly know how an orange juice should taste like.
  • Sugar or its cheaper substitutes like high-fructose corn syrup are added to nearly every single product we consumer including pasta sauce, salad dressing, bread, peanut butter, etc.
  • Even “healthier” options such as low-fat ones also contain added sugar. Honey, fruit juices are no exceptions. Like I mentioned above with orange juice, there is no real juice sold in any store.
  • According to the World Health Organization (WHO) sugar should make up less than 10% of our energy intake per day. But we already exceed that. No wonder obesity is a major epidemic keeping hospitals and health care professionals busy.

The infographic below shows how much sugar is in some of the favorite foods we eat:

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SUGAR

Source: Death by sugar, MaClean’s

Why Invest in Emerging Markets Infrastructure Sector

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Emerging markets are called so because they are still developing relative to the developed world. Emerging countries lack many of the things that are taken for granted every day in developed countries. This includes systems like foundations, political and legal systems, military and police forces, academic systems, healthcare systems, transportation systems, basic necessities like water and sewer,  emergency response systems, etc. Of all these systems, the most important for emerging markets is the infrastructure is the infrastructure sector. Hence these countries are focusing their development efforts on building roads, railways, water and sewer systems, airports, and ports. As developing countries offer plenty of growth for the infrastructure sector, companies operating in this field ample opportunities for emerging market investors to profit from.

Here are two reasons for investing in emerging markets infrastructure stocks or ETFs:

1. Electricity is the one of the most basic necessities of modern life. However in developing countries this is still a luxury. Not all people in those countries have access to electricity. In some countries such as India, millions of people still do not have access to electricity. According to one article, 300 million people or 80 million households mostly in villages in India do not have access to power. Hence India needs to increase its power capacity by many fold from its current levels to serve the full population with electricity.

The following chart shows that electricity production in emerging countries is way below than that of the levels of developed countries:

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Electricity Production Emerging Markets

2. In Brazil, water shortage is an issue that became acute recently. Despite having the Amazon river and abundance of forests, cities like Sao Paulo were hit with a water shortage earlier this year due to drought. Brazil also does not have enough roads, railroads and airports. For example, many roads in rural and the Amazon area are not yet paved. This leads to high transportation costs and inefficient movement of goods and people.

The table below shows the comparison of transportation infrastructure in the developed and emerging countries:

Trasnportation Indrastructure Emerging Markets

Source: Weak economies in emerging countries: Good or bad news for OECD countries?, Natixis

Developing countries as a whole have less than one-fourth of the roads in the U.S. based on kms per 100,000 inhabitants. Similarly they lag in the number of airports, ports and railway lines.

The following chart shows infrastructure ranking among select developing countries:

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Infra Ranking

Source: Chart of the week: Brazil’s bottlenecks, April 1, 2013, FT beyond brics

One way to profit from the growth in infrastructure in emerging countries is via investing in an ETF that focuses on this sector. The  iShares Emerging Markets Infrastructure  ETF (EMIF) tracks the performance of 30 largest companies in the infrastructure sector in emerging markets. The fund has an asset of about $83.0 million and expense ratio of 0.75%. China and Brazil account for about 60% of the fund’s portfolio. Some of the fund holdings include Korea Electric Power (KEP) of South Korea, Grupo Aeroportuario del Sureste, SAB de CV (ASR) of Mexico, oil distributor Ultrapar (UGP) of Brazil, etc.

Other related ETFs that investors can consider are PowerShares Emerging Markets Infrastructure ETF (PXR), INDXX Brazil Infrastructure Index Fund (BRXX), INDXX India Infrastructure Index Fund (INXX) and INDXX China Infrastructure Index Fund (CHXX).

Disclosure: Long UGP

Knowledge is Power: International Diversification, FX Reserves, Happiest Country Edition

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Chicago

Chicago

World GDP Change Over The Past 200 Years

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One of the key strategies for success in investing is diversification. It involves not just investing in various asset classes in  a single country but a good diversified portfolio should include a variety of assets spread over many regions or countries. Global diversification in the equity portion of a portfolio is important since equity markets’ performance vary wildly from one country to another every year. For example, U.S. equities were star performers compared to European stocks. But this year, European stocks are handily beating their U.S. peers at so far.

The long-term performance of equity markets is related to the economic performance of a country or region. Over the years, the economic power of countries have changed. The chart below shows how the share of world’s GDP has changed over the past 200 years:

World GDP Change in 200 Years

Source: Mastering Global Diversification: What the Masters Tells Us About the Markets by Jeffrey Klientop, April 15, 2015 Charles Schwab

Today emerging markets of China and India were developed markets 200 years ago when they accounted for 50% of the world’s economic output. Even Brazil was also a rich in the 19th century when the boom in rubber demand helped its economy. The beautiful Amazon Theater in Manaus in the hear of the Amazon rainforest was built during that time. However Malaysia took over the leading producer of rubber when some rubber plants were taken to that country to establish a plantation by a man. This led to the decline in the wealth of Brazil.

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Amanzon Theater

The Amazon Theater, Manaus, Brazil

The chart above also shows that the U.S. was a tiny emerging country back in the 1800s. At that time, the country was neither a military nor an economic superpower. The share of Europe’s economic output as a percentage of the world’s GDP has also declined since the late 1900s.

The key takeaway is that economic growth shifts over the years and hence today’s emerging countries could one be tomorrow’s developed countries.

Related ETFs:

  • iShares MSCI Brazil Index (EWZ)
  • iShares S&P India Nifty 50 (INDY)
  • iShares FTSE/Xinhua China 25 Index Fund (FXI)
  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions