This article is excerpted from Tom Yeung’s Profit & Protection newsletter. To make sure you don’t miss any of Tom’s picks, subscribe to his mailing list here.
Oil Drops Below $100… Are We In a Recession Yet?
On Tuesday, the price of West Texas Intermediate briefly dipped below $100 for the first time since May.
“Wall Street says a recession is coming,” Philip Aldrick at Bloomberg News reported. “Consumers say it’s already here.”
It’s hard to miss the warning signs. This year, my neighbors’ July Fourth celebrations involved no secret trip to New Hampshire for fireworks. Instead, the pyrotechnics were limited to Roman candles, the tiniest of pencil-sized firecrackers and a sigh of relief that their car will soon be paid off.
The numbers don’t lie either. In May, the University of Michigan Index of Consumer Sentiment hit 58.4, one of its lowest points since the depths of the 2008 financial crisis. When the average lease payments for a new vehicle swallow up nearly 20% of a median household’s income, it doesn’t take an economist to know that something’s wrong.
That’s the reason why the core Profit & Protection “buy” list contains no oil or commodity-based stocks. With the U.S. facing the prospect of a drawn-out slowdown, demand for cyclical, low-value materials will be volatile at best.
Instead, regular readers will notice a growing focus on healthcare and other non-cyclical companies that can thrive even during slowdowns. And today, we’ll consider the three healthcare stocks investors need to put on their radar.
The 3 Leaders of the Gene Editing Revolution
On Tuesday, I introduced nine biotech stocks with outstanding growth potential. After decades of development, the first CRISPR gene editing technologies could hit markets by 2023.
- Vertex Pharmaceuticals (NASDAQ:VRTX). A+
- Editas Medicine (NASDAQ:EDIT). A
- Beam Therapeutics (NASDAQ:BEAM). A
- Regeneron Pharmaceuticals (NASDAQ:REGN). A-
- Intellia Therapeutics (NASDAQ:NTLA). A-
- Crispr Therapeutics (NASDAQ:CRSP). A-
- Biogen (NASDAQ:BIIB). B-
Of the group, my top picks are Crispr Therapeutics (CRSP) and Beam Therapeutics (BEAM).
Crispr Therapeutics (CRSP)
The largest pure-play gene-editing firm is an obvious pick for the Profit & Protection watchlist. It has the most high-quality “shots-on-goal” among gene-editing startups, and is the blue-chip pick for the watchlist. The firm now has five drugs in clinical trials, while nearest rival Intellia only has two.
Crispr also has greater upside potential than Vertex Pharmaceuticals, a diversified biopharma company and drug marketing firm. Vertex’s $74 billion market capitalization gives little room for anything better than a 50% gain over the next several years. Meanwhile, Crispr’s $5.8 billion market cap gives the smaller startup a 100% upside if just one of its five drug candidates reaches FDA approval in the coming years. Multiple wins could send shares into the $30 billion range, given the average value of a blockbuster drug.
Finally, Crispr has some of the best proof of a working CRISPR-Cas9 platform so far. In 2021, the company revealed positive trial results for CTX001, its treatment of sickle cell disease (SCD) and transfusion-dependent beta-thalassemia (TDT). All 15 patients with TDT ended the trial transfusion-free, while all seven SDC patients were free of vaso-occlusive crises, a common complication of sickle cell. The drug could launch as soon as 2023, according to industry watchers.
Beam Therapeutics (BEAM)
The smaller gene-editing firm is a less obvious choice for the Profit & Protection watchlist. The firm only has three candidates in IND-enabling studies to secure in-human clinical trials and is about 3 to 5 years behind Crispr when it comes to approvals.
Yet Beam makes the Profit & Protection watchlist because it is a leader in base editing — the fiercest competitor to CRISPR-Cas9 systems. Rather than acting as “genetic scissors” the way CRISPR does, Beam’s base editing chemically transforms individual base pairs from A-T to G-C.
It’s a far more precise (and valuable) method of gene editing.
“More than 31,000 such mutations in the human genome are known to be associated with human genetic diseases. But CRISPR is not particularly efficient at correcting them,” notes Sandeep Ravindran at Nature. Instead, it’s base editors that “excel at single-site mutations.”
Base editors also cause fewer genetic errors. Cutting genetic code with CRISPR creates the risk that “random bases can be inserted or deleted (indels), altering the gene sequence,” Mr. Ravindran continues. “By altering just a specific nucleotide without making double-stranded breaks, base editors cause fewer unwanted mistakes.” For in-vivo treatments, that gives a far better chance of curing a patient instead of causing uncontrolled genetic mutations.
That gives Beam Therapeutics an unusually high degree of downside protection. Though its drugs might be years away from commercialization, the company could realistically get acquired for its intellectual property if share prices drop another 50%. And if the firm’s drugs reach viability in 5 to 10 years, investors can expect BEAM shares to rise 5x in short order.
And One More Pick…
Finally, Luke Lango has one final biotech pick that’s upending the world of gene-editing. Rather than focus on specific therapies, this “picks and shovels” play wraps software and automation around cell engineering workflows.
In other words, it’s a synthetic biology firm that designs, writes and inserts DNA directly into target cells.
Looking for cells that can produce vaccines? Or yeast that can create food-grade protein through fermentation? These futuristic goals are surprisingly close, thanks to this biotech marvel.
Additionally, the firm currently trades around $3, giving investors a potential 5x to 10x upside. Luke’s found plenty of 1,000%+ tech winners before. And this one is a blue-chip gene-editing one that will interest you.
When to Buy Biotechs?
For all of biotech’s potential, every firm has the same problem:
Crispr, Beam and all other research-based firms are “long duration” stocks that suffer during rate hikes.
These drug research firms typically have zero revenue; their entire business involves testing therapies and selling successful candidates to larger companies. It’s how BioNTech (NASDAQ:BNTX) managed to trounce rival Novavax (NASDAQ:NVAX) in Covid-19 vaccine development; the former partnered with Pfizer (NYSE:PFE) to help with production and distribution, while the latter struggled to go it alone.
This “research-only” business model, however, has a significant downside. Because a biotech’s profits are all in the future, a more significant share of its value must be “discounted” back compared to companies with profits today.
Rising interest rates have biotech investors on the back foot. Discount rates tend to move together with interest rates, so tightening cycles tend to torpedo the value of long duration stocks. Shares of Crispr Therapeutics have already fallen 50% over the past year. And Beam — as an earlier-stage startup — has naturally fallen even further.
Though I’m adding CRSP shares to the Profit & Protection shortlist of stocks to buy, it will take signals of Fed easing before the company earns a place on the core “buy” list. But when that happens, investors would be wise to scoop up shares of these high-potential stocks with downside protection to match.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.