By Philip van Doorn, MarketWatch
The Nasdaq Composite Index has nearly doubled since the end of 2011, led by its riskiest sector: biotechnology.
But biotech companies vary more than most in other industries. Some have no hopes of ever making money. And others are backed by products that are established in the marketplace and are quite profitable.
The Nasdaq Biotechnology Index /zigman2/quotes/210598353/realtime NBI +0.98% has risen 227% since the end of 2011 through Feb. 25, compared with a 91% return for the broader Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +1.51% , which is within 4 percentage points of its all-time intraday high of 5,132.52, set in March 2000.
“Looking at the simple average of all the individual biotechnology companies on the Nasdaq, the group is higher by [roughly] 300% since 2011. However, if we exclude the biotechnology companies ... the simple average of the rest of the Nasdaq listed companies are up on average about 75%,” according to Myles Clouston, Nasdaq’s senior director of advisory services.
So there’s no question that this rally has been driven by biotech.
But how risky is it to play this sector?
The following chart, showing this year’s best-performing Nasdaq biotech stocks, illustrates why it’s important to be very careful when buying:
|Company||Ticker||Total return - YTD||Total return - 2014||Total return - 3 years||Total return - 5 years|
|Genetic Technologies Ltd. Sponsored ADR||/zigman2/quotes/208953622/composite GENE||233%||-73%||-68%||12%|
|Cellular Biomedicine Group Inc.||/zigman2/quotes/201267130/composite CBMG||129%||153%||310%||195%|
|Semler Scientific Inc.||/zigman2/quotes/201267132/delayed SMLR||117%||N/A||N/A||N/A|
|Curis Inc||/zigman2/quotes/207276322/composite CRIS||111%||-47%||-30%||17%|
|Coherus Biosciences Inc.||/zigman2/quotes/202304465/composite CHRS||97%||N/A||N/.A||N/A|
|Exelixis Inc.||/zigman2/quotes/204247745/composite EXEL||87%||-77%||-53%||-58%|
|Stereotaxis Inc.||/zigman2/quotes/205025017/composite STXS||78%||-59%||-65%||-94%|
|Neurocrine Biosciences Inc.||/zigman2/quotes/202459527/composite NBIX||77%||139%||388%||1,423%|
|Echo Therapeutics Inc.||/zigman2/quotes/205706544/delayed ECTE||70%||-57%||-87%||-87%|
|Total returns assume reinvestment of dividends. Sources: Nasdaq and FactSet|
Among this year’s 10 best performers, eight were publicly traded for all of 2014 and five of those saw huge losses for the year. Five of those eight also have suffered painful losses over the past three years.
Since most biotech firms have so much riding on trial results and government approvals of new medications or treatments, “it’s all about a binary event,” according to Clouston. And we all know how risky it can be to hope that a stock will be driven higher by positive headlines.
Then again, Clouston said during an interview on Thursday that compared with the heady days of early 2000, there is now “a much bigger bench of companies that have actual products and fundamentals that support the appreciation.”
Rather than trying to pick winners, a much safer way to play Nasdaq biotech stocks is with an exchange traded fund, such as the iShares Nasdaq Biotechnology ETF /zigman2/quotes/206189322/composite IBB +1.02% , which is up 12% this year, more than double the Nasdaq’s increase. The ETF returned 34% during 2014, and its three-year return through Wednesday is 186%, with a five-year return of 304%.
Profitable Nasdaq biotech companies
If you want to study individual Nasdaq biotech stocks, you might want to focus on larger and profitable companies. To pare our list, we have included the 10 Nasdaq biotechnology companies with the widest net income margins (earnings divided by revenue) over the past 12 reported months. They also must have market values of at least $100 million: