Afraid of Biotech? Here’s How to Fit Healthcare Into Any Portfolio

Biotech stocks can turbo-charge a portfolio, but yet many average investors without a PhD in biochemistry are intimidated by them.

Motley Fool analysts Kristine Harjes and David Kretzmann are here to help on this clip of Industry Focus: Healthcare! Find out how The Motley Fool's Supernova real money portfolios allocate their holdings toward the healthcare sector and why you should approach early stage healthcare companies very differently than established, profitable ones.

A full transcript follows the video.

This podcast was recorded on Jan. 13, 2016.

Kristine Harjes: So, one of the things that really piqued my interest when thinking about Supernova and how it would relate to this healthcare show was fitting in healthcare as an industry or sector to a broader portfolio. We talk a lot on this show about specific stocks and it's more Stock Advisor, Rule Breakers-y, where we're like, "Oh, we're really bullish on Gilead Sciences," but we don't ever really talk about how you would fit that into the broader portfolio, and what you should be thinking about when you look to allocate specific percentages to different companies. So, what is the strategy are and how do you use it for healthcare?

David Kretzmann: Sure. Taking a step back, as I mentioned, Supernova is really David Gardner's service. We're following his growth investing style. Within the Supernova universe, which is about 200 companies -- again, these are all the companies he's recommended over the past 12 years or so -- a good chunk of those are healthcare or biotech companies, and they've actually outperformed the Supernova universe as a whole. So, the biotech stocks have outperformed the rest of the stocks by a decent margin. But then, on the flip side, the amount of members we see following those biotech stocks is much less than the other stocks. So there's kind of a disconnect there.

Harjes: It's understandable, it's a complicated space, it's hard to really know what you're doing and it.

Kretzmann: Right. Because, obviously, a consumer facing companies like Chipotle or Under Armour, those are companies we see everyday. But unless you're a scientist or doctor or, in some cases, maybe a patient, you're not going to have that hands-on experience with these different drugs and these drug developments.

Harjes: Yeah, buying a burrito is a little easier to understand than developing a CAR-T receptor.

Kretzmann: Just a bit, yeah. So, part of what we're doing in Supernova with our newest real-money portfolio, Odyssey 2, which I'm heading up, we actually have a team member, Brian Orelli, who happens to have a PhD in cancer biology from the University of Chicago. So, he's someone who has a lot of expertise with biotech in the healthcare space. So, we've been talking to Brian, "How do we fit these biotech stocks, which have been historically great performers within Supernova, into real money portfolios like Odyssey 2, when we're just starting out, launching today?"

And I think the conclusion that Brian reached and we reached is, obviously, we're not going to put 50% of the portfolio into biotech stocks, just like we're not going to put 50% of the portfolio into any one industry or another. So, you might see between 10-25% of the portfolio put into biotech stocks. We're not going to have a hard number, there are a lot of nuances to investing.

But then, you have to take a step back and think, "Okay, are we focusing on early stage biotechs that don't even have a product on the market yet, vs, the more established players like Biogen, Gilead, Celgene." So, talking with Brian, he was like, "No, maybe we should have some core positions in some of these more-established biotechs like Celgene or Gilead or Biogen.Then, maybe start with 4-6 smaller positions with companies like Ionis Pharmaceuticals, companies that have a lot of drugs in development but don't necessarily have revenue coming in from drugs that are selling right now.

So, figuring out that distinction between the more established players that have drugs on the market, they have a pretty deep pipeline, vs. those early stage biotechs. And starting with smaller positions in those early stage biotechs, maybe a little bit of bigger positions in those more established players.