I struggled to find a candidate for my exponential technology value portfoliothis month. Nothing came up in my scan in the cybersecurity sector, and the only contender in the drone industry wasn't available on my stockbroking platform. I finally found a suitable investment in biotech, although it took a bit of digging.
Firstly, let's define biotech and how it fits into my expo tech theme. The clue is in the name- it's biological technology. It harnesses cellular and biomolecular processes to develop products that makes our lives better. While biotech can be employed in various industries- for example, it was used to create cheese- in the case of the medical sector, it develops drugs to combat infectious, life threatening diseases such as cancer. Doubts persist about some of the industry's business practices- Martin Shkreli became a hate figure after hiking the price of Daraprim from $13.50 to $750- but on the whole, biotech firms seem to fight the good fight.
Next, I'll put the opportunity in context. According to Deloitte's 2016 Global Life Sciences Outlook, the biotech industry is projected to grow to $445 billion by 2019. Considering sales were just short of $290 billion in 2014, that's a compounded annual growth rate (OTCPK:CAGR) of 9%. Furthermore, biotech's share of global prescriptions and over the counter sales is expected to increase from 23% in 2014 to 26% in 2019. I'd like a piece of this upward trend.
My previous holding in this sector was Illumina (NASDAQ:ILMN) which Wired Magazine called the 'Google of genetic testing', as it generates 90% of datafrom DNA sequencing. I added this share to my portfolio last summer and at the time of publishing, it was up a respectable 8%. But as with my original holdings in other sectors, it was a gut feel and I wanted to replace it with a value play.
I couldn't find a direct replacement for Illumina, so I expanded my search to the biotech industry in general. And while I usually rely on an exchange traded fund (ETF) to narrow down the choice, I took a different approach this month. I used MarketWatch's free stock screener to generate a list of biotech companies with a price- earnings (NYSE:PE) ratio of between 10 and 20. This turned out much quicker than my previous method, although I'm not sure it will work for other expo tech sectors, as they aren't classified as a Dow Jones industry group.
I then applied my value investing screen to the remaining companies. As a reminder, here are my criteria, loosely based on Benjamin Graham's enterprising investing screen:
· Rising earnings per share (NYSEARCA:EPS) over the last five years
· Current ratio greater than 1.5
· Paying some level of dividends
· Price- to- book (NYSE:PB) ratio of less than 1.2
Only one company came close to meeting these criteria, so I decided to scale back the chart which usually accompanies these monthly updates to compare my existing holding with the one it replaced.
Based in California, Amgen (NASDAQ:AMGN) discovers, develops, manufactures and delivers treatments for a range of serious illnesses in the areas of cancer, cardiovascular disease and neuroscience. According to its website, it uses technology like advanced genetics to understand the basics of human biology and get to the bottom of complex diseases. Some of its 'blockbuster' drugs include Epogen, Neupogen, Aranesp and Neulasta (hopefully you're not too familiar with any of them). Interestingly, at $ 121.1 billion, the company's market capitalisation is at least $100 billion more than the other value plays in my portfolio, so it'll be interesting to monitor how Amgen performs in comparison (Skyworks, with a market cap of $19 billion, is up 26% since I added it in January).
As you can see from the chart, Amgen meets all of my criteria other than the price- book ratio. It's only just above the equivalent figure for the iShares Nasdaq Biotechnology ETF (which holds Amgen), a benchmark I've used in the past to justify including a share in my value portfolio. A further concern is the high current ratio, although CEO Bob Bradway recently said the company intends to put some of its surplus cash to work this year through acquisitions.
One more drawback is I'm adding another US share to my portfolio, so it's now concentrated in US and German stocks. I'd prefer greater geographical diversification, but I'll stick to picking shares that meet my criteria rather than based on where they're located.
Finally, here's a summary of my value portfolio's performance to date:
· Bertrandt- up 6%
· Krones- up 9%
· Skyworks Solutions- up 26%
· Berkshire Hathaway B- down 8%
Disclosure: I am/we are long AMGN.