The 5 Best Biotech Stocks to Buy in 2020

Why do investors take risk? Certainly not to lose money. Investors take on risk because they want the prospect of bigger returns.

One of the sectors with higher risk and the highest reward is biotech.

Nothing says "home run" for a biotech stock like a new drug coming to market.

Over the last 10 years, the biotech sector has produced nearly 20% annualized gains.

That's a tasty reward for sure. But then again, the last decade has been a roaring bull market.

2020 could be different.

Investors are going have to be much more selective with their risk taking.

In prior years (like 2019), one could merely buy a basket of biotech stocks in an index or ETF and take the money to the bank.

Going forward, individual stock selection in the biotech space is the best strategy.

How can we find the winners? Or, more importantly, how can we avoid the losers?

"Slow and steady" is my key theme for success selecting stocks to own in the next year.

When the broader markets are expected to squeeze out 5% to 7%, hitting double digits will be a major victory.

Don't get me wrong, that might not be as sexy as prior years. But outperformance of any kind, especially if we can avoid losses should the market trade lower, is a good thing.

I'm sticking to our trusty Money Morning Stock VQScore™ model. It's an excellent way to narrow the biotech universe to a handful of stocks that investors should target in 2020.

One of the biggest keys is finding biotech stocks that are already making money. While those operating with large losses may have the highest upside, those with profits are better situated to withstand a more challenging market in 2020.

Here's the bottom line: Investors can still make solid returns owning biotech stocks next year. They just need to be selective.

Here are the five biotech stocks I'm targeting in 2020...

Best Biotech Stocks to Buy in 2020, No. 5:

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One of my favorite biotech stocks is also the riskiest of today's top five. In 2019, Ligand Pharmaceuticals Inc. (NASDAQ: LGND) severely trailed the market with a big loss for the year. In fact, it's been down 22% in the last 12 months.

Expect that to change in 2020.

The company is solidly profitable, and those profits are growing. Analysts expect Ligand to show profit growth of 20% in the coming year.

While Ligand does not pay a dividend at the moment, profit growth will attract investors this year.

I expect a reversal of fortune and a gain of more than 10% as the company delivers results from one quarter to the next.

Best Biotech Stocks to Buy in 2020, No. 4:

Biotech is so red-hot, big pharmaceutical companies like Bristol-Myers Squibb Co. (NYSE: BMY) want in on the action.

One of the biggest mergers completed in 2019 was Bristol acquiring biotech giant Celgene. In the last six months, BMY stock is up over 47%.

I expect more of the same in 2020.

Analysts expect Bristol to grow profits by a whopping 40% this year. Despite shares gaining in 2019, Bristol trades for only 14 times current year estimated earnings.

In addition to profit growth, Bristol pays investors a healthy dividend of 2.8%. As the company prints money, investors get paid to wait for stock appreciation.

I expect a combined return for Bristol to easily exceed 10% in 2020 making it a must-own biotech stock for next year.

Best Biotech Stocks to Buy in 2020, No. 3:

If there is safety in profitable biotech stocks, then Biogen Inc. (NASDAQ: BIIB) has to be a "must own" in 2020.

Last year, the company was whacked in March after the it announced it would be discontinuing testing of its widely anticipated Alzheimer's drug. Shares lost some $15 billion of market cap, or 30% of its value after the news was released.

Funny thing about numbers and data though... they can be manipulated.

With so much at stake, and with the help of the FDA, Biogen announced that its Alzheimer's drug did indeed have efficacy. That efficacy comes at higher dosages, so it is unclear what the final result will be.

What is known is the resumption of pursuit of approval was cheered with a 20% rally in the stock.

These gyrations give investors today an opportunity to buy a cash machine. That cash machine may or may not be growing, but it's a war chest worth owning in 2020.

Best Biotech Stocks to Buy in 2020, No. 2:

The combination of high dividends and stock appreciation will be needed to outperform the market this year. One biotech stock with such traits is GlaxoSmithKline Plc. (NYSE: GSK).

Glaxo is a leader in biotech research, and the company is well established. More importantly it is solidly profitable. The best part about owning Glaxo in 2020 has to be the more than 4% dividend the company pays to investors.

With profits of just over $3 per share in 2019 and this year expected by analysts, that dividend would appear to be quite safe. Thus the risk of owning Glaxo is relatively low at the moment.

Its beta, a measurement of risk, is at a very low 0.37.

In the last 12 months, GSK jumped more than 23%. I believe that success will continue, and I expect 10% to 15% in total returns for the year.

Best Biotech Stocks to Buy in 2020, No. 1:

What if we can get a dividend and own a stock that is growing its profits at a rapid clip? That would be the No. 1 biotech stock to buy in 2020.

In the case of Amgen Inc. (NASDAQ: AMGN), investors get a dividend of 2.65% plus a company that is expected to grow its profits by 10% in 2020.

The company has a number of drugs already on the market and a fairly rich pipeline of drug prospects that should keep the current valuation dynamic in play.

I don't expect a repeat of 2019, but I do expect outperformance of the overall indexes in 2020.

Amgen's beta is just over 1, meaning we are taking slightly more than market risk here. Not bad for a biotech stock.

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