Erez’s Framework for Identifying Stocks With 10x Upside
Highlights From the Investment Guidebook for Porter & Co. Biotech Frontiers
| Editor’s Note: We’re on the verge of a generational bull market in biotech… As Porter explained in Monday’s Daily Journal, the biotech sector currently offers some of the most compelling risk-to-reward opportunities you’re ever likely to find in the public markets. Investors who position themselves properly today stand to earn life-changing returns over the next several years. To help our readers take advantage of this opportunity, we’re sharing some exclusive insights from Erez Kalir, the brilliant analyst for our Biotech Frontiers advisory, normally available only for our Partner Pass members. In this week’s issue of The Big Secret on Wall Street – adapted from sections of the Investment Guidebook for Biotech Frontiers – Erez explains some of the critical factors he uses to identify the most lucrative opportunities for his subscribers. For those who do not currently subscribe to Biotech Frontiers, we hope you enjoy this “peek behind the curtain” of this exciting research service. If you are interested in learning more about Biotech Frontiers, call Lance James, our Director of Customer Care, at 888-610-8895 or 443-815-4447. |
I (Erez) grew up in the San Francisco Bay Area in the 1980s. At that time in the Bay Area – even if you knew nothing about computers – you could sense that something important was happening… something that was likely to change the world. If you were lucky, like me, you had a childhood friend whose dad brought back one of the very first Apple II computers and let you tinker with it. Or maybe you had another friend – as I did – who subscribed to one of the first dial-up internet services while he was still a teenager, and toyed with it so that he could trade stocks online… If you were curious, experiences like these would have helped clue you in earlier than most to the revolutionary impact the internet would have on every aspect of life
In every human lifetime, we encounter a small handful of tsunamis – the proverbial 100-foot-tall waves that change everything. . . across technology, economics, and culture. I am 51 years old, and in my lifetime so far, I’ve seen two: the PC-internet revolution and the advent of Bitcoin/Web 3.0.
We are now on the cusp of two more. One is the proliferation of artificial intelligence (“AI”) into our everyday lives.
The second, I believe, is the unfolding revolution in life sciences and biotech. It will be at least as important, far reaching, and profound. It’s my great privilege to get to explore this with you in Biotech Frontiers.
The thing about these tsunamis is… if you are relatively early to them, understand what they’re about, and are able to identify the right financial instruments to ride them, you can earn generational wealth. For example, investing $1 million into a basket of Amazon (AMZN), Google (GOOGL), Microsoft (MSFT), and Apple (AAPL) in 2003 would have generated $50 million today.
Another thing about these tsunamis is that they’re not only about generating wealth, but also about understanding the world we live in as it changes. There aren’t many sectors of the stock market where novel developments are going to reshape how humans live. This isn’t true, for example, about property-and-casualty (P&C) insurance or financial services.
But it’s true about life sciences – it’s true about biotech. What’s coming down the pike in life sciences holds out the potential to eradicate or dramatically shrink the leading disease-driven causes of death… and to change our sense of what it means to be human – for instance, by giving us the tools to pre-select many traits of our offspring before they’re born.
The Science
To identify the most promising investments opportunities driven by science, it makes sense to start with the science.
We’re on the lookout for big, important advances – the kinds of discoveries that have the potential to change the standard of care for a disease or entire category of illnesses… or that can function as entirely new platforms to power drug development.
To find these innovations before they enter the mainstream, we track down cutting-edge labs at the world’s leading research universities. We zero in on labs that have a proven track record of spinning out ideas that lead to clinical impact. In other words, we rely on the world’s best scientists to guide our search for high-impact science.
Let me share an example . . .
MIT Professor Bob Langer, a chemical engineer by training, is known among life-sciences entrepreneurs as “the Edison of Medicine.” A scientist’s h-index score measures how often other scientists cite his papers. For a scientist who has run a lab for 20 years, an h-score of 20 is good… 40 is great… 60 is remarkable. Bob Langer’s h-score is 230 – the highest of any engineer ever. The Langer Lab’s discoveries have translated into both clinical and commercial success. His lab has given rise to 40 companies – 39 of them either acquired or still in existence, with a collective market value of over $50 billion.
We at Biotech Frontiers pay attention to Langer’s Lab. But we also find and follow the younger, less-famous labs that are building reputations among their scientific peers as hotbeds of innovation. We do this by speaking with leading scientists… top biotech entrepreneurs… and by reading scientific papers.
Because Biotech Frontiers is not meant to be a variation of Scientific American – but instead to focus on where transformative science can propel an investment – we then filter ideas for their commercial promise.
We’ve talked about following “top gun” scientists… and about sifting out commercial relevance. One other lens that we bring to bear on our investigation of science is a focus on important scientific themes. These are the domains in science that have either already achieved or are nearing a critical mass that can propel them forward explosively. These are the domains in science where, if they were stocks, we’d be observing sharp “gap ups” in the price charts. A few examples –
- AI-driven and computational-biology-driven drug discovery and development
- Next-generation, precision medicine-guided immuno-oncology
- Genomic editing technologies and gene therapies
- Advances in tissue engineering and regenerative medicine
- Medicine 2.0 early-detection technologies
The Catalysts
“Hope is not a strategy” sums up one of the most frustrating things about many investors: they ask us to rely on hope. Take the classic Warren Buffett-style of investing, as taught by Buffett’s mentor Benjamin Graham in his iconic book, The Intelligent Investor. Graham suggests looking for stocks that trade at a steep discount to intrinsic value, where one can buy shares with a significant margin of safety to their actual worth.
Years later, influenced by his partner, the late Charlie Munger, Buffett would add an additional criterion to Graham’s advice: Look for high-quality businesses – those that are capital efficient and have strong economic “moats” that protect them from rivals. Porter has put his own spin on this style of investing when he suggests patiently assembling a portfolio of “forever stocks” – a collection of the world’s best businesses, which you’ve ideally purchased at compelling prices by waiting to buy until shares go on sale.
I’ve got no problem with this approach to investing so long as your time horizon is, well, almost forever. For my 14-year-old daughter Daphne or Porter’s 17-year-old son Traveler – both of whom can anticipate decades of runway ahead of them – patiently assembling a “forever portfolio” seems exactly right. It also makes sense for those wealthy enough to carve out a piece of their assets to invest for an indefinite duration, perhaps even intergenerationally – for example, someone in their 60s or 70s putting together a stock portfolio that will be passed on to their kids or grandkids.
But what about those of us with a shorter investment horizon? Or folks who, due to an upcoming milestone in their lives (e.g., a child starting college, or their own retirement), anticipate a need to access their investment dollars at a foreseeable point in the future?
An Alternative Approach: Catalyst-Driven Investments
The good news is proven investment strategies exist that are catalyst driven – instead of simply hoping that a stock will appreciate in price someday, when Mr. Market comes to recognize its intrinsic value, we can anticipate concrete, specific events that will move the stock price significantly. If these events play out favorably, they will propel a stock’s price upward. Of course, if they play out unfavorably, they can result in a stock getting crushed. Either way, we can generally count on them to move the price.
Porter & Co. readers are already familiar with one of the best, time-tested strategies that relies on catalysts: investing in distressed debt. With distressed-debt investing, the most important catalyst is a bond’s maturity date. If a company is already in bankruptcy, the approval of its restructuring plan and its eventual emergence from Chapter 11 are meaningful catalysts too.
Key Catalysts for Life Sciences Stocks
Life-sciences investing, like investing in distressed debt, is also catalyst driven. The five most important catalysts for life-science companies are:
- Clinical trial results
- Regulatory decisions
- Commercial launches of new drugs and therapies
- Refinancings
- Partnership announcements
Each of these catalysts has potential to move a life-science stock up more than 100%, or down by more than 50%.
The Big Picture Backdrop
Interest rates are like financial gravity. When interest rates are low, stocks float upward. When rates are high and gravity is strong, valuation multiples collapse – and stocks fall back to Earth.
But while physical gravity causes all objects to fall at the same constant rate (9.8 m/s2 ), financial gravity has a stronger effect on some kinds of stocks than others. And life-sciences stocks working to bring novel drugs and therapies to the world tend to be among the hardest hit.
To grasp why, it’s helpful to think of development-stage biotech stocks as long-duration equities… or the equity siblings to long-duration bonds – one whose maturity is far off in the future. As most investors know, these bonds are especially sensitive to changes in interest rates.
A long-duration equity is one whose free cash flows (“FCF”) are far off in the future. And this describes most development-stage biotechs. In the near future, they have to spend a lot of money up front – performing R&D, running clinical trials, paying lawyers to help them obtain regulatory approvals, and eventually launching their new product. All of this is money out the door – before any money comes in the door.
If they’re successful, their FCF tends to lie far out in the future. These FCFs can be astronomical for an effective new drug. But they have to be discounted back to the present. And as anyone who’s built a financial model knows, the more periods you have to discount your FCF back, the more sensitive the model is to changes in your discount rate – or in this case, to the U.S. interest rates that are the foundational benchmark for every discount rate in the world.
The Biotech Bear Market
The biotech industry didn’t exist in the early 1980s. Genentech, the granddaddy of modern biotechnology companies, IPO’d in October 1980 – and at the time it had no direct competitors. So the severe Fed interest rate hikes of the past couple years truly are a first for the biotech sector.
And because we’ve now understood how biotech stocks are long-duration equities – similar to long-duration bonds in their sensitivity to interest rates – we can also appreciate why: these interest rate hikes have devastated biotech.
The bear market in biotech that we’re in the midst of today is the longest, biggest, and most punishing bear market in the history of biotech. While the Nasdaq Biotech Index is down 20% from its peak in September 2021, small-cap biotech stocks in the Russell 3000 are down 70%, and biotech stocks removed from the Russell 3000 because they no longer meet its inclusion criteria are down over 85%. Large-cap biotech underperformed the S&P 500 by over 30% in 2023.
Which is a perfect opportunity for us.
The Opportunity Ahead
Self-made billionaire and legendary investor Shelby Collum Davis once remarked, “You make most of your money during a bear market. You just don’t realize it at the time.” We’re going to lean into Davis’s maxim while we can.
The great news is that today – amid the fiercest biotech bear market of all time – we can buy some of the most promising life-sciences companies in the world at a fraction of the price they traded at during the last bull market… prices that hold out potential for many multiple returns when the biotech-market tide turns – or when specific companies experience positive catalysts.
Porter’s Note: As my friend and mentor, Dr. Steve Sjuggerud, taught me at the beginning of my career in the 1990s – and as he famously taught True Wealth subscribers over two decades – “Investors only need one biotech bull market to achieve generational wealth.”
There have been three of these massive biotech bull markets since October 14, 1980, when Genentech became the first biotech company to do an IPO.
And, right now, a new major biotech bull market is forming.
For a variety of economic reasons (the COVID bubble, the huge inflation that followed, the increase in interest rates to fight it, etc.) biotech has not participated in the current tech rally. And, as a result, there has likely never been a wider gap, ever, between the performance of technology stocks and biotech stocks. The chart below tells the story.
QQQ, representing the top 100 companies in the Nasdaq Composite Index, is up 160% over the past five years. But ALPS Medical Breakthroughs ETF (SBIO), a collection of small-cap biotech innovators, is only up 18% over that period.
This huge gap in performance will not last.
Erez’s Biotech Frontiers subscribers have already had the chance to earn some fantastic returns since we launched this service in January.
After some big early gains – such as 87% on Kodiak Sciences (KOD) – Erez decided to close nine of his first dozen recommendations, earning average returns of more than 20% in only about three months.
In the roughly six months since, his seven open recommendations have continued to perform well, with average returns of around 20% – including one big winner that’s up 61% – and just one stock that’s down.
But Erez believes the real opportunity – the chance to generate truly life-changing returns – is still ahead as the brutal biotech bear market ends and a new bull market begins.
You see, the Federal Reserve is now cutting interest rates again, following its widely publicized “pivot” in monetary policy last month. This means the Big Picture Backdrop has suddenly become much more favorable for biotech.
Meanwhile, several of the stocks in the Biotech Frontiers portfolio have huge potential catalysts on the horizon, including:
- A company with a best-in-class drug candidate to treat rosacea, a skin condition causing severe redness and rashes, which has crushed the current standard-of-care drug in two head-to-head Phase III clinical FDA trials, with an FDA approval decision coming on November 4.
- A tiny company with a new, promising drug to treat MASH, a progressive liver condition that can lead to cirrhosis, whose closest competitor is valued in the billions of dollars, which has indicated it will be entering a game-changing partnership with a strategic Big Pharma partner in the next six to nine months.
- A company with patent litigation pending against Big Pharma giants Pfizer (PFE) and Moderna (MRNA) for their COVID-19 vaccine-delivery technology, which has won important early rulings in its favor, and may benefit from a multibillion-dollar settlement over the next year.
- A company trading for less than one half of its net cash that will be submitting a New Drug Application to the FDA later this year for a potential blockbuster, with an approval potential six to nine months later.
- A company that has the first disease-altering gene therapy for Huntington’s disease, a terrible neurodegenerative illness, that will release additional market-moving clinical-trial data in mid 2025.
- And a chance to invest alongside the “Elon Musk of biotech,” a legendary genius CEO (and largest shareholder) of a tiny company who could earn a $25 million bonus – but only if he increases the company’s market capitalization to $10 billion by 2026, which would represent a tripling in value from where it is today.
In other words, Erez’s favorite companies may soon experience a “perfect storm” of historically cheap valuations, easing financial “gravity,” and wildly bullish catalysts that could send their stocks soaring 2x, 3x, 5x… or even 10x their current values relatively quickly.
Porter & Co.
Stevenson, MD
P.S. Porter caused a ruckus just before last week’s Porter & Co. annual conference over a publication called Compounding Quality, written by a young Belgian man named Pieter Slegers – whose views on investing are almost eerily similar to Porter’s.
After reading Pieter’s Compounding Quality, Porter insisted that the conference team find a way to get him to speak.
And Pieter didn’t disappoint. Porter called him “my investing brother from another mother.” Pieter wowed the audience with his focus on exceptionally high-caliber companies that have big moats and trade at a reasonable price.
The fact is: Pieter is one of a kind. While he’s still a young man, he’s got the insight (and performance) of an investor with decades of experience, and following his ideas could make you a lot of money.To find out more about Compounding Quality, and get the full portfolio and all of Pieter’s ongoing analysis and recommendations, check out the special offer Pieter has put together exclusively for Porter & Co. It’s a fantastic deal: You’ll receive the Founding Partner package for the price of an annual membership (on the web page link, just select the “Annual” choice, and Pieter will manually upgrade you.)