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Buying into Biotech and Energy

June 21, 2006

By Steven Halpern
MSN Money

• Buy 100 shares of Genentech (DNA, news, msgs) at the open.


• Buy 500 shares of Biocryst Pharmaceuticals (BCRX, news, msgs) at the open.


• Buy 200 shares of Penn West Energy Trust (PWT.UN, news, msgs) at the open.

We will be adding several more names later this week and into next, and will spend more time discussing the market outlook and our portfolio theory. But for now, we want to take our first portfolio positions, which will be in the biotech and energy sectors. We'll begin with a pair of biotech bets; while the sector must be considered speculative, for long-term investors I can think of no better place to invest. And importantly, despite what may occur during the limited duration of the Strategy Lab, I have the additional comfort of knowing that these positons are ones that many investors may hold long after the Lab has ended.

Within the newsletter field, there are two services that I consider "must reads" for any serious biotech investor. The first is The Medical Technology Stock Letter; John McCamant is the long-standing industry leader among biotech advisors.

I've been reading the newsletter for well over 20 years, first under his father Jim and for the last decade under John's authorship. Prior to taking over the newsletter, John was involved in the venture capital side of biotech, and he knows the industry, the technology, the research efforts, the executives, and the FDA approval process as well as anyone in the business.

The second top-tier biotech service is The ChangeWave Biotech Investor. Although only launched last year, Michael Shulman has shown all the traits of a winning advisor - accuracy, quality of research, and strong stock performance. And while the letter is new, Michael draws on a very savvy research team at the ChangeWave organization -- headed by Toby Smith -- which publishes several of the most successful newsletters in the industry.

When I spoke with both Michael and John about the Strategy Lab, both offered the same top pick in the sector - Genentech (DNA, news, msgs). With both leading biotech experts agreeing on a favorite stock, there was little question that Genentech would be a component of our portfolio.

An avian flu stock

Our second biotech play goes much farther out on the risk spectrum -- Biocryst Pharmaceuticals (BCRX, news, msgs). We go with this stock for three reasons. First, it is recommended by two experts in the field. Once again, we turn to John McCamant, who offers this as a second pick to pair with DNA. He is joined by Michael Murphy, who for 20+ years has covered the full spectrum of technology, and gives Biocryst his "Top Buy" rating.

The company is best known as an "avian flu" play, as its development stage drug Premavir is considered a potential vaccine in the event of a pandemic. Mike Murphy says, "A pandemic would change life around the world for many years. We expect a 'megashift' regarding the amount of money that governments all over the world will spend for vaccines and antivirals to treat an H5N1 pandemic."

A pandemic -- or just the perception and fear of one - is one of the "surprises" that I've written about that can unexpectedly devastate a portfolio; this stock will serve as a hedge against that unlikely -- but possible - occurrence. More importantly, this stock serves a double purpose. Although John views its role as a "pandemic play" as an additional reason the stock might rise, his buy rating is based on the firm's less-recognized role as a structure-based drug designer.

John believes that the stock is undervalued simply based on the potential of Fosodine, a drug currently in trials that destroys activated immune system T-cells and is a potential treatment for leukemia and other cancers. The stock is down sharply from its high early in the year of $23. Meanwhile, news related to its Fosodine trials is expected over the coming month.

For those interested in all the details regarding both of these biotech stocks, a review of Genentech from Michael Schulman and a review Biocryst from John McCamant will be posted on my website, thestockadvisors.com, at noon.

An energy holding with upside potential

Another holding that will provide us with upside potential but also serve as a hedge -- in this case various monetary-, geopolitical-, and/or weather-related risks -- is Penn West Energy Trust (PWT.UN, news, msgs). For this idea, we turn to Gordon Pape, the editor of Internet Wealth Builder, and a leading authority on both Canadian stocks in general and Canadian income trusts in particular.

He explains, "The recent pull-back in the energy sector provides an opportunity to take positions in Canadian energy trusts at prices that are 20% or more below the 52-week high." And his top choice right now is Penn West Energy Trust, which is about to merge with NYSE-listed Petrofund (PTF, news, msgs) to form the largest conventional oil and gas trust in North America.

He adds, "The combined entity will have annual cash flow of $1.5 billion and a reserve life index of 10.5 years on a proved plus probable basis. Penn West's management, which will operate the combined venture, is highly regarded and the company has a history of innovation and strong growth.Buy at current levels for excellent cash flow and capital gains potential."

Also, in my goal to find stocks with multiple catalysts for appreciation, Penn West has applied for an NYSE listing which should give a boost to the price when it is obtained. In addition, the shares pay a monthly distribution of 34 cents Canadian (about $0.305 U.S. at current exchange rates) for a yield of 10.3% based on the recent price.

I'd also add that the stock is a recent buy recommendation from Richard Lehmann, editor of The Forbes/Lehmann Income Report. Richard has long been considered one of the leading experts on a wide variety of income vehicle and his bullish view on Penn West should add to our comfort in establishing this position.

Overall, with hurricane season just beginning and continued turmoil in the Middle east and other energy-producing areas, I expect that at some time over the summer we will see higher energy prices - perhaps significantly so. Add to that the lack of political risk affecting the oil markets in Canada, the chance for a boost from a double-digit monthly dividend, the stock's potential gain from the added exposure resulting from a potential move to the NYSE, its integration with Petrofund, and the endorsement of two leading experts in this sector, and we have a solid energy buy for our portfolio.