Investing Beyond The Trends: Smart Ways To Play Biotech, Broadband And Housing

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As 2013 wound to a close, investors who owned 3D printing stocks were laughing all the way to the bank. 3D Systems and Stratasys were up more than 10-fold from their 2009 lows, and Voxeljet was up over 200% since its IPO that fall.

Then, the bottom dropped out. Not because the future potential of 3D printing turned entirely to dust, but because expectations raced so far ahead of reality, and the stocks’ valuations grew so extreme, that any misstep was met with swift and brutal punishment.

Since the start of 2014 the trio have each tumbled more than 70%, illustrating a critical reality for investors betting on major trends: the most obvious ways to play those trends are often the most expensive, volatile and vulnerable too.
So how can investors seize onto a crucial development that has the potential to create big profits without getting burned? One way is to identify opportunities “beyond the trend” or what are often called second derivative bets on a particular area of promise.
Chevy Chase Trust, which recently topped the annual Forbes list of Top Wealth Managers, calls it thematic investing, and it’s a hallmark of how the Maryland-based wealth manager advises clients. It’s so crucial the firm actually orients its entire research process around the concept, unlike the far more common structure of assigning coverage based on sectors, industries, or geography.

“We see those classifications as an impediment to thinking freely about these big themes,” says director of research Spencer Smith. A thematic approach “puts the wind at your back for years if not decades.”
Identifying those themes – Chevy Chase has focused on big ones like an aging population, re-urbanization in America and the human genome – is one thing, but drilling down to the best ways to access them requires further diligence.

Amy Raskin, the firm’s chief investment officer, draws a distinction between investable themes and those that sound good but deliver little to investors. “If there’s no competitive advantage we’re not interested,” she says. The benefits need to accrue to the companies, and by extension shareholders, as opposed to just customers.

Take the proliferation of wireless Internet as an example. The equipment necessary, routers and the like, has gotten progressively cheaper over the years. “Profits get competed away,” says Raskin.

On the aging population theme for instance, Chevy Chase has moved out of past investments in companies that make hearing aids and begun doing a deep dive into firms pursuing therapeutic treatments for hearing loss, though it is still in the research phase and has yet to make any investments. One microcap biotech firm, GenVec, is partnering with Novartis in an effort to use an altered virus to rewire hair cells critical to hearing.

Raskin calls the advent of genomic and molecular medicine the biggest investment theme of her lifetime. Where it once cost billions and took more than a decade to sequence a genome, it can now be done in a matter of hours for a few thousand dollars.

Biotech companies are an obvious way to gain exposure to the rapid development. The iShares Nasdaq Biotechnology ETF, up 350% over the last five years, owns established, profitable players like Gilead Sciences GILD +0.32% and Amgen AMGN +0.09% alongside earlier-stage, more speculative stocks. To Raskin though, owning the leader in DNA sequencing equipment is a much safer bet on the biotech boom.

“In any gold rush, you want to invest in the picks and shovels,” she says, and Chevy Chase owns shares of Illumina ILMN -0.11%, the clear industry leader. Illumina is hardly a cheap, left-for-dead stock — it’s up 27% over the last year and carries a hefty multiple of 61 times earnings — but in a sector where a slew of ultra-risky companies trade at infinite multiples because they’re miles away from producing profits, or even revenues, it stands out.

“That’s the now investment though,” Raskin says. Looking further ahead, she sees a huge opportunity in storing and processing the vast amounts of data being generated in the biotech industry.

Imagine a Netflix NFLX -0.4%-like platform where instead of recommending movies based on users with similar tastes, patients and doctors could see which drugs and treatments worked best for patients with similar diseases. That’s the world Raskin sees.




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