As Managing Editor Mark Najarian pointed out in a recent Money and Markets column, the IPO market is moving along at a blistering pace. In fact, Investor’s Business Daily recently reported that the average new issue is up nearly 40 percent from its initial offering price.
And as I warned in a follow-up to Mark’s column, be wary of the current favorable IPO pricing trend despite their recent successes. That’s because buying IPOs is tricky business, even for professionals.
The health-care sector has recently dominated the IPO market, specifically the biotech field. “The enormous amount of biotech IPOs is a continuation of 2013 but at an even faster pace,” said Scott Sweet, senior managing partner at IPOboutique.com.
Indeed, biotech companies such as Dicerna (DRNA), Ultragenyx (RARE), Auspex (ASPX), Revance Therapeutics (RVNC) and GlycoMimetics (GLYC) have all entered the IPO market in 2014 with varying degrees of short-term investment success.
|Will investors continue to pour money into exciting but early stage biotech ventures?|
Are we in a biotech bubble? Will investors continue to pour money into these exciting but still early stage ventures?
No one knows for sure, especially in an industry such as biotech where disappointments are more common than successes, and the time between an idea for a new medicine an actual product can take years to develop.
When commenting on biotech companies, Patricia Danzon, a Wharton professor of health care management, says: “There’s a huge amount of real uncertainty about the likely performance of some of these companies — scientific uncertainty about whether drugs will pan out in [late-stage] trials and market uncertainty as to how the products will be accepted. There have been past booms that have ended up being bubbles, and with these early-stage companies, we won’t know until the drugs succeed or fail on the market.”
If biotech companies are too risky, what’s the everyday investor supposed to do?
With the S&P 500 health sector having gained a bit over 12 percent so far this year and more than 25 percent over the past year, I think it’s worth looking at some of the more established and high-quality companies in the health-care industry for investors looking to participate in the health care boom without taking on a lot of the risk associated with the high flyers.
[Editor’s mention: Wealthy investors are surprisingly picky about the companies they invest in — demanding the very best in order to preserve their capital and make it grow. For Bill’s latest report on how you can join them, click here.]
One of my favorite companies in the health-care sector is Becton Dickinson (BDX, Weiss Ratings B) Becton Dickinson whose stock has gained about 9 percent year-to-date. Becton Dickinson is the world’s largest manufacturer and distributor of medical surgical products, such as needles and syringes. The company also manufactures a wide array of diagnostic instruments and reagents. International revenue accounts for 58 percent of the company’s business.
Becton Dickinson’s needle and surgical tool empire has provided investors with excellent returns on capital for years. The essential and disposable nature of its medical products, which account for nearly half of its total sales, gives the firm robust cash flows for reinvestment into its business.
The focus over the past few years has been growing its business in the emerging markets, where the marketplace remains largely untapped and the prevalence of infectious diseases makes Becton Dickinson single-use needles and syringes valuable to both nurses and patients.
The company’s executives are among the best in the industry.
What’s more, the company remains committed to its history of consistent dividend growth. With a current yield of 1.78 percent and a dividend that’s likely to grow in the future, shareholders can expect a solid cash-on-cash return while they wait for the stock to appreciate.
In today’s risky investment environment, my aim is to focus on high quality and Becton Dickinson is at the top of my list.