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How to Find the Best Biotech Stocks

Fears that a Clinton administration would introduce price controls pressured pharmaceutical industry share prices in the months preceding the election. With such controls considered unlikely under Trump, pharma prices rebounded substantially last week, but many are still below year-ago highs.

Biotechs Have Best Upside Potential

Within the pharmaceutical industry, in my view at least, biotechs have the most upside potential. These are firms that employ biological processes to produce their products as opposed to traditional pharmaceutical makers that attempt to discover curative characteristics of existing chemicals. The attraction of biotechs is that they are usually smaller than traditional pharmas, but the products in their pipelines can have blockbuster potential.

Stock Screener

Here’s how you can use the free Finviz stock screener to find biotech candidates worth investigating. Start by selecting Screener on the Finviz home page (http://finviz.com). Finviz uses “filters” to define selection criteria. Click “All” on the filters bar to display the available filters. Then, use the dropdown menu associated with each filter that you want to use to specify selection values.

Define Candidate Universe

Start by limiting your list to biotech stocks by using the Industry filter to select Biotechnology.

Market Sentiment

Institutional investors such as mutual funds employ squads of analysts to research potential investments. It makes sense to piggyback on their efforts rather than doing the work yourself. Do that using the Institutional Ownership filter by selecting “Over 50 percent” which means that the institutional players hold at least half of each passing firm’s outstanding shares.

Stock analysts issue buy/sell/hold advice on stocks that they follow. Since they’re known for being easy graders, it’s best to avoid stocks that they’re not advising buying. Use the Analyst Recommendation filter and specify “buy or better.”

Fastest Growing Biotechs

Your best bets in any industry are stocks with strong earnings growth prospects. For biotechs, you should require a least 10 percent expected annual growth. Use the “EPS Growth Next Year” filter and specify “Over 10 percent.”

Fundamentals Count

In almost any industry, the most profitable candidates are your best bets. Return on Equity, a widely used profitability gauge, compares 12-months’ net income to shareholders equity (book value). Use the Return on Equity filter and require “over 15 percent,” which will limit your list to the most profitable biotechs.

Biotechs with promising products in development, but none yet on the market, are risky business. We’ll rule them out by requiring meaningful sales. Unfortunately, we can’t directly screen for sales on Finviz. We’ll get around that by requiring a reasonable price to sales ratio, which compares share price to ‘sales per share’ (total sales divided by total shares). Most firms racking up meaningful sales would have price/sales ratios below 10. Use the “P/S” filter and require “under 10”

Cut Risk

Finally, use the Price filter and select “over $5” to assure that your screen only lists stocks trading above the level. I’ve found that the cheaper the stock, the higher the risk. In my experience, stocks trading under $5 almost always have problems.

Biotech Candidates

My screen turned up three biotechs: Cambrex (CBM), Celgene (CELG) and Regeneron Pharmaceuticals (REGN.

As always, consider the stocks turned up by this screen as research candidates, not a buy list. The more you know about your stocks, the better your results.

published 11/16/16

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