The Secret Formula That Makes Biotech Investing Profitable

It's no secret that biotech investing could net you triple-digit returns, but not every biotech stock is a winner. The industry is notoriously volatile, and you could end up holding a dud just as easily as the next frontrunner.

Fortunately, we've done the research and developed a simple formula to find the biotech stocks with market-beating potential...

Over the last 10 years, the biotech industry returned 301.25%, while the S&P 500 only managed returns of 99.80%, according to Fidelity Investments.

And those gains keep coming.

For example, Menlo Therapeutics Inc. (Nasdaq: MNLO) climbed 72.63% since Jan. 25.

But finding the right biotech stock to get behind isn't as easy as it looks.

"It's almost impossible for someone without a serious biotech, medical, or chemistry background to have any idea about which companies will hit the jackpot and which ones will not," Money Morning Special Situation Strategist Tim Melvin told us.

Just look at Solid Biosciences Inc. (Nasdaq: SLDB), which cratered 66.66% since Jan. 26.

That's why you need an advantage over the market when investing in biotech stocks, and we're here to provide that leg up.

You see, biotech companies may boast about their grand plans, but the reality is, it's extremely difficult to launch a successful biotech product.

"Only one in 5,000 drugs makes it from pre-clinical testing all the way to FDA approval in the United States," Melvin said.

He's spent a lot of time crunching numbers and searching for the answer to the biotech investing conundrum.

"We could just buy all of the biotech companies, but over the last 20 years, that has involved owning, on average, 213 stocks at a time. It is also a tad volatile, with several horrid years and a maximum drawdown of 84%. The sector beats the market rather handily, but 213 is a lot of stocks to own, and most people cannot handle the wild volatility."

Fortunately, Melvin has developed a strategy to navigate through the volatile biotech sector that retail investors can follow.

"The only way for me, as a value investor, to participate in the biotech revolution and profit machine without breaking my brain was to develop a purely quantitative approach to the problem," he told us.

Tim is 27-year veteran of the financial services and portfolio management industries, serving as a broker for millionaires for more than two decades

BIG, FAST PROFITS: This one pick paid 100% in seven days, then 205% the next day, and 410% by the next week. You've got to see how it's done...

When he gives investing advice, we pay attention.

And the simple strategy he developed will help our readers capitalize on the profitability of biotech stocks while also avoiding the massive volatility that comes with the sector....

The Secret Formula Behind Finding the Best Biotech Stocks

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

When trying to find the best biotech stocks to buy, Melvin has one key focus.

"I simply take the universe of biotech stocks and only buy the ones that generate positive net income," Melvin revealed.

"You end up with 22 stocks each year, and the returns are roughly 20% better than owning all the biotechs," he said.

That's 20% better than a sector that already crushes the overall market, which means you're only buying the stocks with real upside.

Plus, it dramatically reduces your risk.

You will eliminate owning biotech stocks that can have volatile price swings because of cash burn and clinical failures.

Instead, you will own shares of successful companies that are already generating cash.

Currently, there are 24 companies on the list of profitable biotechs, and Tim wanted to share two of the companies he found on his screen.

"Ligand Pharmaceuticals Inc. (Nasdaq: LGND) doesn't actually market anything. It acquires technologies needed to produce new drugs and then licenses them to biotech and drug companies in exchange for royalties on drugs produced by its technology. It currently has 165 drug development programs in place with 95 partners and should produce close to $200 million in sales in 2018. There is no sign of the train stopping anytime soon, as the consensus analyst estimate for growth over the next five years is more than 25% annually."

Vertex Pharmaceuticals Inc. (Nasdaq: VRTX) also appeared on his screen.

"Vertex Pharmaceuticals is another profitable biotech company with a bright future. It discovers, develops, and sells small molecule drugs for patients with serious diseases. It has drugs for cystic fibrosis, hepatitis C, and is working on new drugs for oncology and neurology conditions. It has been growing earnings by more than 50% a year, and that rate of earning is increasing."

The Bottom Line: To maximize your gains and limit your losses in the volatile biotech industry, investors should only buy the stocks of companies with positive net income. Two of those companies right now are Ligand Pharmaceuticals Inc. (Nasdaq: LGND) and Vertex Pharmaceuticals Inc. (Nasdaq: VRTX).

If You're Looking to End 2018 with $1 Million in Your Account, Start Right Here... Because it only takes 10 minutes to set yourself up to make more money from the markets than you've ever seen in your life. I've never seen a simpler method for scoring fast, consistent, money-doubling opportunities. A year from now, you could be looking back at this moment as the defining event of your financial future. The first step on your road to millions starts right here.

Follow Money Morning on FacebookTwitter, and LinkedIn.